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—— 

CAPITAL 

in the Twenty-First Century 

THOMAS 

PIKETTY 

TRANSLATED BY ARTHUR GOLDHAMMER 











Capital in the Twenty-First Century 



CAPITAL IN THE 
TWENTY-FIRST 
CENTURY 


Thomas Piketty 

Translated by Arthur Goldhammer 


The Belknap Press of Harvard University Press 


CAMBRIDGE, MASSACHUSETTS 
LONDON, ENGLAND 
1014 




Copyright © 2014 by the President and Fellows of Harvard College 
All rights reserved 

Printed in the United States of America 

First published as Le capital au XXIsiecle, 
copyright © 2013 Editions du Seuil 

Design by Dean Bornstein 

Library of Congress Cataloging-in-Publication Data 
Piketty, Thomas, 1971- 
[Capital au XXIe siecle. English] 

Capital in the twenty-first century / Thomas Piketty; translated by Arthur Goldhammer. 

pages cm 

Translation of the author’s Le capital au XXIe siecle. 

Includes bibliographical references and index. 

ISBN 978-0-674-43000-6 (alk. paper) 

1. Capital. 2. Income distribution. 3. Wealth. 4. Labor economics. 

I. Goldhammer, Arthur, translator. II. Title. 

HB501.P43613 2014 
332.041—dc23 
2013036024 


Contents 


Acknowledgments • vii 

Introduction ■ i 

Part One: Income and Capital 

i. Income and Output • 39 

2. Growth: Illusions and Realities • 72 

Part Two: The Dynamics of the Capital/Income Ratio 

3. The Metamorphoses of Capital • 113 

4. From Old Europe to the New World • 140 

5. The Capital/Income Ratio over the Long Run • 164 

6. The Capital-Labor Split in the Twenty-First Century • 199 

Part Three: The Structure of Inequality 

7. Inequality and Concentration: Preliminary Bearings • 237 

8. Two Worlds • 271 

9. Inequality of Labor Income • 304 

10. Inequality of Capital Ownership • 336 

11. Merit and Inheritance in the Long Run • 377 

12. Global Inequality of Wealth in the Twenty-First Century • 430 

Part Pour: Regulating Capital in the Twenty-First Century 

13. A Social State for the Twenty-First Century • 471 

14. Rethinking the Progressive Income Tax • 493 

15. A Global Tax on Capital • 515 

16 . The Question of the Public Debt • 540 

Conclusion ■ 571 

Notes • 579 

Contents in Detail • 6 57 
List of Tables and Illustrations • 663 
Index • 671 




Acknowledgments 


This book is based on fifteen years of research (1998-2013) devoted essentially 
to understanding the historical dynamics of wealth and income. Much of this 
research was done in collaboration with other scholars. 

My earlier work on high-income earners in France, Les hauts revenus en 
France au 2oe siecle (2001), had the extremely good fortune to win the enthu¬ 
siastic support of Anthony Atkinson and Emmanuel Saez. Without them, my 
modest Francocentric project would surely never have achieved the interna¬ 
tional scope it has today. Tony, who was a model for me during my graduate 
school days, was the first reader of my historical work on inequality in France 
and immediately took up the British case as well as a number of other coun¬ 
tries. Together, we edited two thick volumes that came out in 2007 and 2010, 
covering twenty countries in all and constituting the most extensive database 
available in regard to the historical evolution of income inequality. Emman¬ 
uel and I dealt with the US case. We discovered the vertiginous growth of in¬ 
come of the top 1 percent since the 1970s and 1980s, and our work enjoyed a 
certain influence in US political debate. We also worked together on a num¬ 
ber of theoretical papers dealing with the optimal taxation of capital and in¬ 
come. This book owes a great deal to these collaborative efforts. 

The book was also deeply influenced by my historical work with Gilles 
Postel-Vinay and Jean-Laurent Rosenthal on Parisian estate records from the 
French Revolution to the present. This work helped me to understand in a 
more intimate and vivid way the significance of wealth and capital and the 
problems associated with measuring them. Above all, Gilles and Jean-Laurent 
taught me to appreciate the many similarities, as well as differences, between 
the structure of property around 1900-1910 and the structure of property 
now. 

All of this work is deeply indebted to the doctoral students and young 
scholars with whom I have been privileged to work over the past fifteen years. 
Beyond their direct contribution to the research on which this book draws, 
their enthusiasm and energy fueled the climate of intellectual excitement in 
which the work matured. I am thinking in particular of Facundo Alvaredo, 
Laurent Bach, Antoine Bozio, Clement Carbonnier, Fabien Dell, Gabrielle 



ACKNOWLEDGMENTS 


Fack, Nicolas Fremeaux, Lucie Gadenne, Julien Grenet, Elise Huilery, Ca¬ 
mille Landais, Ioana Marinescu, Elodie Morival, Nancy Qian, Dorothee 
Rouzet, Stefanie Stantcheva, Juliana Londono Velez, Guillaume Saint- 
Jacques, Christoph Schinke, Aurelie Sotura, Mathieu Valdenaire, and Ga¬ 
briel Zucman. More specifically, without the efficiency, rigor, and talents of 
Facundo Alvaredo, the World Top Incomes Database, to which I frequently 
refer in these pages, would not exist. Without the enthusiasm and insistence 
of Camille Landais, our collaborative project on “the fiscal revolution” would 
never have been written. Without the careful attention to detail and impres¬ 
sive capacity for work of Gabriel Zucman, I would never have completed the 
work on the historical evolution of the capital/income ratio in wealthy coun¬ 
tries, which plays a key role in this book. 

I also want to thank the institutions that made this project possible, start¬ 
ing with the Ecole des Hautes Etudes en Sciences Sociales, where I have 
served on the faculty since 1000, as well as the Ecole Normale Superieure and 
all the other institutions that contributed to the creation of the Paris School 
of Economics, where I have been a professor since it was founded, and of 
which I served as founding director from 2005 to 2007. By agreeing to join 
forces and become minority partners in a project that transcended the sum of 
their private interests, these institutions helped to create a modest public 
good, which I hope will continue to contribute to the development of a multi¬ 
polar political economy in the twenty-first century. 

Finally, thanks to Juliette, Deborah, and Helene, my three precious 
daughters, for all the love and strength they give me. And thanks to Julia, 
who shares my life and is also my best reader. Her influence and support at 
every stage in the writing of this book have been essential. Without them, I 
would not have had the energy to see this project through to completion. 


viii 


Capital in the Twenty-First Century 



Introduction 


"Social distinctions can be based only on common utility." 
—Declaration of the Rights of Man and the Citizen, article i, 1789 


The distribution of wealth is one of today’s most widely discussed and contro¬ 
versial issues. But what do we really know about its evolution over the long 
term? Do the dynamics of private capital accumulation inevitably lead to the 
concentration of wealth in ever fewer hands, as Karl Marx believed in the 
nineteenth century? Or do the balancing forces of growth, competition, and 
technological progress lead in later stages of development to reduced inequal¬ 
ity and greater harmony among the classes, as Simon Kuznets thought in the 
twentieth century? What do we really know about how wealth and income 
have evolved since the eighteenth century, and what lessons can we derive 
from that knowledge for the century now under way? 

These are the questions I attempt to answer in this book. Let me say at 
once that the answers contained herein are imperfect and incomplete. But 
they are based on much more extensive historical and comparative data than 
were available to previous researchers, data covering three centuries and more 
than twenty countries, as well as on a new theoretical framework that affords 
a deeper understanding of the underlying mechanisms. Modern economic 
growth and the diffusion of knowledge have made it possible to avoid the 
Marxist apocalypse but have not modified the deep structures of capital and 
inequality—or in any case not as much as one might have imagined in the 
optimistic decades following World War II. When the rate of return on capi¬ 
tal exceeds the rate of growth of output and income, as it did in the nineteenth 
century and seems quite likely to do again in the twenty-first, capitalism auto¬ 
matically generates arbitrary and unsustainable inequalities that radically un¬ 
dermine the meritocratic values on which democratic societies are based. 
There are nevertheless ways democracy can regain control over capitalism and 
ensure that the general interest takes precedence over private interests, while 
preserving economic openness and avoiding protectionist and nationalist re¬ 
actions. The policy recommendations I propose later in the book tend in this 


1 


CAPITAL IN THE TWENTY-FIRST CENTURY 


direction. They are based on lessons derived from historical experience, of 
which what follows is essentially a narrative. 

A Debate without Data? 

Intellectual and political debate about the distribution of wealth has long 
been based on an abundance of prejudice and a paucity of fact. 

To be sure, it would be a mistake to underestimate the importance of the 
intuitive knowledge that everyone acquires about contemporary wealth and 
income levels, even in the absence of any theoretical framework or statistical 
analysis. Film and literature, nineteenth-century novels especially, are full of 
detailed information about the relative wealth and living standards of differ¬ 
ent social groups, and especially about the deep structure of inequality, the 
way it is justified, and its impact on individual lives. Indeed, the novels of Jane 
Austen and Honore de Balzac paint striking portraits of the distribution of 
wealth in Britain and France between 1790 and 1830. Both novelists were in¬ 
timately acquainted with the hierarchy of wealth in their respective societies. 
They grasped the hidden contours of wealth and its inevitable implications 
for the lives of men and women, including their marital strategies and per¬ 
sonal hopes and disappointments. These and other novelists depicted the ef¬ 
fects of inequality with a verisimilitude and evocative power that no statisti¬ 
cal or theoretical analysis can match. 

Indeed, the distribution of wealth is too important an issue to be left to 
economists, sociologists, historians, and philosophers. It is of interest to every¬ 
one, and that is a good thing. The concrete, physical reality of inequality is 
visible to the naked eye and naturally inspires sharp but contradictory political 
judgments. Peasant and noble, worker and factory owner, waiter and banker: 
each has his or her own unique vantage point and sees important aspects of how 
other people live and what relations of power and domination exist between 
social groups, and these observations shape each person’s judgment of what is 
and is not just. Hence there will always be a fundamentally subjective and psy¬ 
chological dimension to inequality, which inevitably gives rise to political con¬ 
flict that no purportedly scientific analysis can alleviate. Democracy will never 
be supplanted by a republic of experts—and that is a very good thing. 

Nevertheless, the distribution question also deserves to be studied in a 
systematic and methodical fashion. Without precisely defined sources, meth- 


2 


INTRODUCTION 


ods, and concepts, it is possible to see everything and its opposite. Some peo¬ 
ple believe that inequality is always increasing and that the world is by defini¬ 
tion always becoming more unjust. Others believe that inequality is naturally 
decreasing, or that harmony comes about automatically, and that in any case 
nothing should be done that might risk disturbing this happy equilibrium. 
Given this dialogue of the deaf, in which each camp justifies its own intellec¬ 
tual laziness by pointing to the laziness of the other, there is a role for research 
that is at least systematic and methodical if not fully scientific. Expert analysis 
will never put an end to the violent political conflict that inequality inevita¬ 
bly instigates. Social scientific research is and always will be tentative and im¬ 
perfect. It does not claim to transform economics, sociology, and history into 
exact sciences. But by patiently searching for facts and patterns and calmly 
analyzing the economic, social, and political mechanisms that might explain 
them, it can inform democratic debate and focus attention on the right ques¬ 
tions. It can help to redefine the terms of debate, unmask certain precon¬ 
ceived or fraudulent notions, and subject all positions to constant critical 
scrutiny. In my view, this is the role that intellectuals, including social scien¬ 
tists, should play, as citizens like any other but with the good fortune to have 
more time than others to devote themselves to study (and even to be paid for 
it—a signal privilege). 

There is no escaping the fact, however, that social science research on the 
distribution of wealth was for a long time based on a relatively limited set of 
firmly established facts together with a wide variety of purely theoretical spec¬ 
ulations. Before turning in greater detail to the sources I tried to assemble in 
preparation for writing this book, I want to give a quick historical overview of 
previous thinking about these issues. 

Malthus, Young, and the French Revolution 

When classical political economy was born in England and France in the late 
eighteenth and early nineteenth century, the issue of distribution was already 
one of the key questions. Everyone realized that radical transformations were 
under way, precipitated by sustained demographic growth—a previously un¬ 
known phenomenon—coupled with a rural exodus and the advent of the Indus¬ 
trial Revolution. How would these upheavals affect the distribution of wealth, 
the social structure, and the political equilibrium of European society? 


3 


CAPITAL IN THE TWENTY-FIRST CENTURY 


For Thomas Malthus, who in 1798 published his Essay on the Principle of 
Population, there could be no doubt: the primary threat was overpopulation. 1 
Although his sources were thin, he made the best he could of them. One 
particularly important influence was the travel diary published by Arthur 
Young, an English agronomist who traveled extensively in France, from 
Calais to the Pyrenees and from Brittany to Franche-Comte, in 1787-1788, 
on the eve of the Revolution. Young wrote of the poverty of the French 
countryside. 

His vivid essay was by no means totally inaccurate. France at that time 
was by far the most populous country in Europe and therefore an ideal place 
to observe. The kingdom could already boast of a population of 20 million in 
1700, compared to only 8 million for Great Britain (and 5 million for En¬ 
gland alone). The French population increased steadily throughout the eigh¬ 
teenth century, from the end of Louis XIV’s reign to the demise of Louis 
XVI, and by 1780 was close to 30 million. There is every reason to believe that 
this unprecedentedly rapid population growth contributed to a stagnation of 
agricultural wages and an increase in land rents in the decades prior to the 
explosion of 1789. Although this demographic shift was not the sole cause of 
the French Revolution, it clearly contributed to the growing unpopularity 
of the aristocracy and the existing political regime. 

Nevertheless, Young’s account, published in 1792, also bears the traces of 
nationalist prejudice and misleading comparison. The great agronomist found 
the inns in which he stayed thoroughly disagreeable and disliked the manners 
of the women who waited on him. Although many of his observations were 
banal and anecdotal, he believed he could derive universal consequences from 
them. He was mainly worried that the mass poverty he witnessed would lead 
to political upheaval. In particular, he was convinced that only the English 
political system, with separate houses of Parliament for aristocrats and com¬ 
moners and veto power for the nobility, could allow for harmonious and peace¬ 
ful development led by responsible people. He was convinced that France was 
headed for ruin when it decided in 1789-1790 to allow both aristocrats and 
commoners to sit in a single legislative body. It is no exaggeration to say that 
his whole account was overdetermined by his fear of revolution in France. 
Whenever one speaks about the distribution of wealth, politics is never very 
far behind, and it is difficult for anyone to escape contemporary class preju¬ 
dices and interests. 


4 


INTRODUCTION 


When Reverend Malthus published his famous Essay in 1798, he reached 
conclusions even more radical than Young’s. Like his compatriot, he was very 
afraid of the new political ideas emanating from France, and to reassure him¬ 
self that there would be no comparable upheaval in Great Britain he argued 
that all welfare assistance to the poor must be halted at once and that repro¬ 
duction by the poor should be severely scrutinized lest the world succumb to 
overpopulation leading to chaos and misery. It is impossible to understand 
Malthus’s exaggeratedly somber predictions without recognizing the way fear 
gripped much of the European elite in the 1790s. 

Ricardo: The Principle of Scarcity 

In retrospect, it is obviously easy to make fun of these prophecies of doom. It 
is important to realize, however, that the economic and social transforma¬ 
tions of the late eighteenth and early nineteenth centuries were objectively 
quite impressive, not to say traumatic, for those who witnessed them. Indeed, 
most contemporary observers—and not only Malthus and Young—shared 
relatively dark or even apocalyptic views of the long-run evolution of the dis¬ 
tribution of wealth and class structure of society. This was true in particular 
of David Ricardo and Karl Marx, who were surely the two most influential 
economists of the nineteenth century and who both believed that a small so¬ 
cial group—landowners for Ricardo, industrial capitalists for Marx—would 
inevitably claim a steadily increasing share of output and income. 2 

For Ricardo, who published his Principles of Political Economy and Taxa¬ 
tion in 1817, the chief concern was the long-term evolution of land prices and 
land rents. Like Malthus, he had virtually no genuine statistics at his disposal. 
He nevertheless had intimate knowledge of the capitalism of his time. Born 
into a family of Jewish financiers with Portuguese roots, he also seems to have 
had fewer political prejudices than Malthus, Young, or Smith. He was influ¬ 
enced by the Malthusian model but pushed the argument farther. He was 
above all interested in the following logical paradox. Once both population 
and output begin to grow steadily, land tends to become increasingly scarce 
relative to other goods. The law of supply and demand then implies that the price 
of land will rise continuously, as will the rents paid to landlords. The land¬ 
lords will therefore claim a growing share of national income, as the share 
available to the rest of the population decreases, thus upsetting the social 


5 


CAPITAL IN THE TWENTY-FIRST CENTURY 


equilibrium. For Ricardo, the only logically and politically acceptable answer 
was to impose a steadily increasing tax on land rents. 

This somber prediction proved wrong: land rents did remain high for an 
extended period, but in the end the value of farm land inexorably declined 
relative to other forms of wealth as the share of agriculture in national income 
decreased. Writing in the 1810s, Ricardo had no way of anticipating the im¬ 
portance of technological progress or industrial growth in the years ahead. 
Like Malthus and Young, he could not imagine that humankind would ever 
be totally freed from the alimentary imperative. 

His insight into the price of land is nevertheless interesting: the “scarcity 
principle” on which he relied meant that certain prices might rise to very high 
levels over many decades. This could well be enough to destabilize entire soci¬ 
eties. The price system plays a key role in coordinating the activities of mil¬ 
lions of individuals—indeed, today, billions of individuals in the new global 
economy. The problem is that the price system knows neither limits nor 
morality. 

It would be a serious mistake to neglect the importance of the scarcity 
principle for understanding the global distribution of wealth in the twenty- 
first century. To convince oneself of this, it is enough to replace the price of 
farmland in Ricardo’s model by the price of urban real estate in major world 
capitals, or, alternatively, by the price of oil. In both cases, if the trend over the 
period 1970-2010 is extrapolated to the period 2010-2050 or 2010-2100, the 
result is economic, social, and political disequilibria of considerable magni¬ 
tude, not only between but within countries—disequilibria that inevitably 
call to mind the Ricardian apocalypse. 

To be sure, there exists in principle a quite simple economic mechanism 
that should restore equilibrium to the process: the mechanism of supply and 
demand. If the supply of any good is insufficient, and its price is too high, 
then demand for that good should decrease, which should lead to a decline in 
its price. In other words, if real estate and oil prices rise, then people should 
move to the country or take to traveling about by bicycle (or both). Never 
mind that such adjustments might be unpleasant or complicated; they might 
also take decades, during which landlords and oil well owners might well ac¬ 
cumulate claims on the rest of the population so extensive that they could 
easily come to own everything that can be owned, including rural real estate 
and bicycles, once and for all. 3 As always, the worst is never certain to arrive. 


6 


INTRODUCTION 


It is much too soon to warn readers that by 2050 they may be paying rent to 
the emir of Qatar. I will consider the matter in due course, and my answer 
will be more nuanced, albeit only moderately reassuring. But it is important 
for now to understand that the interplay of supply and demand in no way 
rules out the possibility of a large and lasting divergence in the distribution of 
wealth linked to extreme changes in certain relative prices. This is the princi¬ 
pal implication of Ricardo’s scarcity principle. But nothing obliges us to roll 
the dice. 


Marx: The Principle of Infinite Accumulation 

By the time Marx published the first volume of Capital in 1867, exactly one- 
half century after the publication of Ricardo’s Principles, economic and social 
realities had changed profoundly: the question was no longer whether farm¬ 
ers could feed a growing population or land prices would rise sky high but 
rather how to understand the dynamics of industrial capitalism, now in full 
blossom. 

The most striking fact of the day was the misery of the industrial prole¬ 
tariat. Despite the growth of the economy, or perhaps in part because of it, 
and because, as well, of the vast rural exodus owing to both population growth 
and increasing agricultural productivity, workers crowded into urban slums. 
The working day was long, and wages were very low. A new urban misery 
emerged, more visible, more shocking, and in some respects even more ex¬ 
treme than the rural misery of the Old Regime. Germinal, Oliver Twist, and 
Les Miserables did not spring from the imaginations of their authors, any 
more than did laws limiting child labor in factories to children older than eight 
(in France in 1841) or ten in the mines (in Britain in 1842). Dr. Villerme’s 
Tableau de Tetat physique et moral des ouvriers employes dans les manufac¬ 
tures, published in France in 1840 (leading to the passage of a timid new child 
labor law in 1841), described the same sordid reality as The Condition of the 
Working Class in England, which Friedrich Engels published in 1845. 4 

In fact, all the historical data at our disposal today indicate that it was not 
until the second half—or even the final third—of the nineteenth century 
that a significant rise in the purchasing power of wages occurred. From the 
first to the sixth decade of the nineteenth century, workers’ wages stagnated 
at very low levels—close or even inferior to the levels of the eighteenth and 


7 


CAPITAL IN THE TWENTY-FIRST CENTURY 


previous centuries. This long phase of wage stagnation, which we observe in 
Britain as well as France, stands out all the more because economic growth 
was accelerating in this period. The capital share of national income—industrial 
profits, land rents, and building rents—insofar as can be estimated with the 
imperfect sources available today, increased considerably in both countries in 
the first half of the nineteenth century. 5 It would decrease slightly in the final 
decades of the nineteenth century, as wages partly caught up with growth. 
The data we have assembled nevertheless reveal no structural decrease in ine¬ 
quality prior to World War I. What we see in the period 1870-1914 is at best 
a stabilization of inequality at an extremely high level, and in certain respects 
an endless inegalitarian spiral, marked in particular by increasing concentra¬ 
tion of wealth. It is quite difficult to say where this trajectory would have led 
without the major economic and political shocks initiated by the war. With 
the aid of historical analysis and a little perspective, we can now see those 
shocks as the only forces since the Industrial Revolution powerful enough to 
reduce inequality. 

In any case, capital prospered in the 1840s and industrial profits grew, 
while labor incomes stagnated. This was obvious to everyone, even though in 
those days aggregate national statistics did not yet exist. It was in this con¬ 
text that the first communist and socialist movements developed. The cen¬ 
tral argument was simple: What was the good of industrial development, 
what was the good of all the technological innovations, toil, and population 
movements if, after half a century of industrial growth, the condition of 
the masses was still just as miserable as before, and all lawmakers could do 
was prohibit factory labor by children under the age of eight? The bank¬ 
ruptcy of the existing economic and political system seemed obvious. People 
therefore wondered about its long-term evolution: what could one say 
about it? 

This was the task Marx set himself. In 1848, on the eve of the “spring of 
nations” (that is, the revolutions that broke out across Europe that spring), he 
published The Communist Manifesto, a short, hard-hitting text whose first 
chapter began with the famous words “A specter is haunting Europe—the 
specter of communism.” 6 The text ended with the equally famous prediction 
of revolution: “The development of Modern Industry, therefore, cuts from 
under its feet the very foundation on which the bourgeoisie produces and ap¬ 
propriates products. What the bourgeoisie therefore produces, above all, are 


8 


INTRODUCTION 


its own gravediggers. Its fall and the victory of the proletariat are equally 
inevitable.” 

Over the next two decades, Marx labored over the voluminous treatise 
that would justify this conclusion and propose the first scientific analysis of 
capitalism and its collapse. This work would remain unfinished: the first vol¬ 
ume of Capital was published in 1867, but Marx died in 1883 without having 
completed the two subsequent volumes. His friend Engels published them 
posthumously after piecing together a text from the sometimes obscure frag¬ 
ments of manuscript Marx had left behind. 

Like Ricardo, Marx based his work on an analysis of the internal logical 
contradictions of the capitalist system. He therefore sought to distinguish 
himself from both bourgeois economists (who saw the market as a self- 
regulated system, that is, a system capable of achieving equilibrium on its own 
without major deviations, in accordance with Adam Smith’s image of “the 
invisible hand” and Jean-Baptiste Say’s “law” that production creates its own 
demand), and utopian socialists and Proudhonians, who in Marx’s view were 
content to denounce the misery of the working class without proposing a 
truly scientific analysis of the economic processes responsible for it . 7 In short, 
Marx took the Ricardian model of the price of capital and the principle of 
scarcity as the basis of a more thorough analysis of the dynamics of capitalism 
in a world where capital was primarily industrial (machinery, plants, etc.) 
rather than landed property, so that in principle there was no limit to the 
amount of capital that could be accumulated. In fact, his principal conclusion 
was what one might call the “principle of infinite accumulation,” that is, the 
inexorable tendency for capital to accumulate and become concentrated in 
ever fewer hands, with no natural limit to the process. This is the basis of 
Marx’s prediction of an apocalyptic end to capitalism: either the rate of re¬ 
turn on capital would steadily diminish (thereby killing the engine of accu¬ 
mulation and leading to violent conflict among capitalists), or capital’s share 
of national income would increase indefinitely (which sooner or later would 
unite the workers in revolt). In either case, no stable socioeconomic or politi¬ 
cal equilibrium was possible. 

Marx’s dark prophecy came no closer to being realized than Ricardo’s. In 
the last third of the nineteenth century, wages finally began to increase: the 
improvement in the purchasing power of workers spread everywhere, and this 
changed the situation radically, even if extreme inequalities persisted and in 


9 


CAPITAL IN THE TWENTY-FIRST CENTURY 


some respects continued to increase until World War I. The communist revo¬ 
lution did indeed take place, but in the most backward country in Europe, 
Russia, where the Industrial Revolution had scarcely begun, whereas the most 
advanced European countries explored other, social democratic avenues— 
fortunately for their citizens. Like his predecessors, Marx totally neglected 
the possibility of durable technological progress and steadily increasing pro¬ 
ductivity, which is a force that can to some extent serve as a counterweight to 
the process of accumulation and concentration of private capital. He no 
doubt lacked the statistical data needed to refine his predictions. He probably 
suffered as well from having decided on his conclusions in 1848, before em¬ 
barking on the research needed to justify them. Marx evidently wrote in great 
political fervor, which at times led him to issue hasty pronouncements from 
which it was difficult to escape. That is why economic theory needs to be 
rooted in historical sources that are as complete as possible, and in this respect 
Marx did not exploit all the possibilities available to him. 8 What is more, 
he devoted little thought to the question of how a society in which private 
capital had been totally abolished would be organized politically and eco¬ 
nomically—a complex issue if ever there was one, as shown by the tragic 
totalitarian experiments undertaken in states where private capital was 
abolished. 

Despite these limitations, Marx’s analysis remains relevant in several re¬ 
spects. First, he began with an important question (concerning the unprece¬ 
dented concentration of wealth during the Industrial Revolution) and tried 
to answer it with the means at his disposal: economists today would do well 
to take inspiration from his example. Even more important, the principle of 
infinite accumulation that Marx proposed contains a key insight, as valid for 
the study of the twenty-first century as it was for the nineteenth and in some 
respects more worrisome than Ricardo’s principle of scarcity. If the rates of 
population and productivity growth are relatively low, then accumulated 
wealth naturally takes on considerable importance, especially if it grows to 
extreme proportions and becomes socially destabilizing. In other words, low 
growth cannot adequately counterbalance the Marxist principle of infinite 
accumulation: the resulting equilibrium is not as apocalyptic as the one pre¬ 
dicted by Marx but is nevertheless quite disturbing. Accumulation ends at a 
finite level, but that level may be high enough to be destabilizing. In particu¬ 
lar, the very high level of private wealth that has been attained since the 1980s 


10 


INTRODUCTION 


and 1990s in the wealthy countries of Europe and in Japan, measured in years 
of national income, directly reflects the Marxian logic. 

From Marx to Kuznets, or Apocalypse to Fairy Tale 

Turning from the nineteenth-century analyses of Ricardo and Marx to the 
twentieth-century analyses of Simon Kuznets, we might say that economists’ 
no doubt overly developed taste for apocalyptic predictions gave way to a 
similarly excessive fondness for fairy tales, or at any rate happy endings. Ac¬ 
cording to Kuznets’s theory, income inequality would automatically decrease 
in advanced phases of capitalist development, regardless of economic policy 
choices or other differences between countries, until eventually it stabilized at 
an acceptable level. Proposed in 1955, this was really a theory of the magical 
postwar years referred to in France as the “Trente Glorieuses,” the thirty glo¬ 
rious years from 1945 to 1975. 9 For Kuznets, it was enough to be patient, and 
before long growth would benefit everyone. The philosophy of the moment 
was summed up in a single sentence: “Growth is a rising tide that lifts all 
boats.” A similar optimism can also be seen in Robert Solow’s 1956 analysis of 
the conditions necessary for an economy to achieve a “balanced growth path,” 
that is, a growth trajectory along which all variables—output, incomes, prof¬ 
its, wages, capital, asset prices, and so on—would progress at the same pace, so 
that every social group would benefit from growth to the same degree, with 
no major deviations from the norm. 10 Kuznets’s position was thus diametri¬ 
cally opposed to the Ricardian and Marxist idea of an inegalitarian spiral and 
antithetical to the apocalyptic predictions of the nineteenth century. 

In order to properly convey the considerable influence that Kuznets’s the¬ 
ory enjoyed in the 1980s and 1990s and to a certain extent still enjoys today, it 
is important to emphasize that it was the first theory of this sort to rely on a 
formidable statistical apparatus. It was not until the middle of the twentieth 
century, in fact, that the first historical series of income distribution statistics 
became available with the publication in 1953 of Kuznets’s monumental 
Shares of Upper Income Groups in Income and Savings. Kuznets’s series dealt 
with only one country (the United States) over a period of thirty-five years 
(1913-1948). It was nevertheless a major contribution, which drew on two 
sources of data totally unavailable to nineteenth-century authors: US federal 
income tax returns (which did not exist before the creation of the income tax 


11 


CAPITAL IN THE TWENTY-FIRST CENTURY 


in 1913) and Kuznets’s own estimates of US national income from a few years 
earlier. This was the very first attempt to measure social inequality on such an 
ambitious scale. 11 

It is important to realize that without these two complementary and in¬ 
dispensable datasets, it is simply impossible to measure inequality in the in¬ 
come distribution or to gauge its evolution over time. To be sure, the first 
attempts to estimate national income in Britain and France date back to the 
late seventeenth and early eighteenth century, and there would be many more 
such attempts over the course of the nineteenth century. But these were iso¬ 
lated estimates. It was not until the twentieth century, in the years between 
the two world wars, that the first yearly series of national income data were 
developed by economists such as Kuznets and John W. Kendrick in the 
United States, Arthur Bowley and Colin Clark in Britain, and L. Duge de 
Bernonville in France. This type of data allows us to measure a country’s total 
income. In order to gauge the share of high incomes in national income, we 
also need statements of income. Such information became available when 
many countries adopted a progressive income tax around the time of World 
War I (1913 in the United States, 1914 in France, 1909 in Britain, 1921 in India, 
1932 in Argentina). 12 

It is crucial to recognize that even where there is no income tax, there are 
still all sorts of statistics concerning whatever tax basis exists at a given point 
in time (for example, the distribution of the number of doors and windows by 
departement in nineteenth-century France, which is not without interest), 
but these data tell us nothing about incomes. What is more, before the re¬ 
quirement to declare one’s income to the tax authorities was enacted in law, 
people were often unaware of the amount of their own income. The same is 
true of the corporate tax and wealth tax. Taxation is not only a way of requir¬ 
ing all citizens to contribute to the financing of public expenditures and proj¬ 
ects and to distribute the tax burden as fairly as possible; it is also useful for 
establishing classifications and promoting knowledge as well as democratic 
transparency. 

In any event, the data that Kuznets collected allowed him to calculate the 
evolution of the share of each decile, as well as of the upper centiles, of the 
income hierarchy in total US national income. What did he find? He noted a 
sharp reduction in income inequality in the United States between 1913 and 
1948. More specifically, at the beginning of this period, the upper decile of the 


12 


INTRODUCTION 


income distribution (that is, the top io percent of US earners) claimed 45-50 
percent of annual national income. By the late 1940s, the share of the top de¬ 
cile had decreased to roughly 30-35 percent of national income. This decrease 
of nearly 10 percentage points was considerable: for example, it was equal to 
half the income of the poorest 50 percent of Americans . 13 The reduction of 
inequality was clear and incontrovertible. This was news of considerable im¬ 
portance, and it had an enormous impact on economic debate in the postwar 
era in both universities and international organizations. 

Malthus, Ricardo, Marx, and many others had been talking about in¬ 
equalities for decades without citing any sources whatsoever or any methods 
for comparing one era with another or deciding between competing hypoth¬ 
eses. Now, for the first time, objective data were available. Although the infor¬ 
mation was not perfect, it had the merit of existing. What is more, the work 
of compilation was extremely well documented: the weighty volume that 
Kuznets published in 1953 revealed his sources and methods in the most min¬ 
ute detail, so that every calculation could be reproduced. And besides that, 
Kuznets was the bearer of good news: inequality was shrinking. 

The Kuznets Curve: GoodNeivs in the Midst of the Cold War 

In fact, Kuznets himself was well aware that the compression of high US in¬ 
comes between 1913 and 1948 was largely accidental. It stemmed in large part 
from multiple shocks triggered by the Great Depression and World War II 
and had little to do with any natural or automatic process. In his 1953 work, he 
analyzed his series in detail and warned readers not to make hasty generaliza¬ 
tions. But in December 1954, at the Detroit meeting of the American Economic 
Association, of which he was president, he offered a far more optimistic inter¬ 
pretation of his results than he had given in 1953. It was this lecture, published 
in 1955 under the title “Economic Growth and Income Inequality,” that gave 
rise to the theory of the “Kuznets curve.” 

According to this theory, inequality everywhere can be expected to follow 
a “bell curve.” In other words, it should first increase and then decrease over 
the course of industrialization and economic development. According to 
Kuznets, a first phase of naturally increasing inequality associated with the 
early stages of industrialization, which in the United States meant, broadly 
speaking, the nineteenth century, would be followed by a phase of sharply 


13 


CAPITAL IN THE TWENTY-FIRST CENTURY 


decreasing inequality, which in the United States allegedly began in the first 
half of the twentieth century. 

Kuznets’s 1955 paper is enlightening. After reminding readers of all the 
reasons for interpreting the data cautiously and noting the obvious impor¬ 
tance of exogenous shocks in the recent reduction of inequality in the United 
States, Kuznets suggests, almost innocently in passing, that the internal logic 
of economic development might also yield the same result, quite apart from 
any policy intervention or external shock. The idea was that inequalities in¬ 
crease in the early phases of industrialization, because only a minority is pre¬ 
pared to benefit from the new wealth that industrialization brings. Later, in 
more advanced phases of development, inequality automatically decreases as a 
larger and larger fraction of the population partakes of the fruits of economic 
growth. 14 

The “advanced phase” of industrial development is supposed to have be¬ 
gun toward the end of the nineteenth or the beginning of the twentieth cen¬ 
tury in the industrialized countries, and the reduction of inequality observed 
in the United States between 1913 and 1948 could therefore be portrayed as 
one instance of a more general phenomenon, which should theoretically re¬ 
produce itself everywhere, including underdeveloped countries then mired in 
postcolonial poverty. The data Kuznets had presented in his 1953 book sud¬ 
denly became a powerful political weapon. 15 He was well aware of the highly 
speculative nature of his theorizing. 16 Nevertheless, by presenting such an 
optimistic theory in the context of a “presidential address” to the main profes¬ 
sional association of US economists, an audience that was inclined to believe 
and disseminate the good news delivered by their prestigious leader, he knew 
that he would wield considerable influence: thus the “Kuznets curve” was 
born. In order to make sure that everyone understood what was at stake, he 
took care to remind his listeners that the intent of his optimistic predictions 
was quite simply to maintain the underdeveloped countries “within the orbit 
of the free world.” 17 In large part, then, the theory of the Kuznets curve was a 
product of the Cold War. 

To avoid any misunderstanding, let me say that Kuznets’s work in estab¬ 
lishing the first US national accounts data and the first historical series of 
inequality measures was of the utmost importance, and it is clear from read¬ 
ing his books (as opposed to his papers) that he shared the true scientific 
ethic. In addition, the high growth rates observed in all the developed coun- 


14 


INTRODUCTION 


tries in the post-World War II period were a phenomenon of great signifi¬ 
cance, as was the still more significant fact that all social groups shared in the 
fruits of growth. It is quite understandable that the Trente Glorieuses fos¬ 
tered a certain degree of optimism and that the apocalyptic predictions of 
the nineteenth century concerning the distribution of wealth forfeited some 
of their popularity. 

Nevertheless, the magical Kuznets curve theory was formulated in large 
part for the wrong reasons, and its empirical underpinnings were extremely 
fragile. The sharp reduction in income inequality that we observe in almost 
all the rich countries between 1914 and 1945 was due above all to the world 
wars and the violent economic and political shocks they entailed (especially 
for people with large fortunes). It had little to do with the tranquil process of 
intersectoral mobility described by Kuznets. 

Putting the Distributional Question Back at the Heart of 
Economic Analysis 

The question is important, and not just for historical reasons. Since the 1970s, 
income inequality has increased significantly in the rich countries, especially 
the United States, where the concentration of income in the first decade of the 
twenty-first century regained—indeed, slightly exceeded—the level attained 
in the second decade of the previous century. It is therefore crucial to under¬ 
stand clearly why and how inequality decreased in the interim. To be sure, the 
very rapid growth of poor and emerging countries, especially China, may well 
prove to be a potent force for reducing inequalities at the global level, just as 
the growth of the rich countries did during the period 1945-1975. But this 
process has generated deep anxiety in the emerging countries and even 
deeper anxiety in the rich countries. Furthermore, the impressive disequilib- 
ria observed in recent decades in the financial, oil, and real estate markets 
have naturally aroused doubts as to the inevitability of the “balanced growth 
path” described by Solow and Kuznets, according to whom all key economic 
variables are supposed to move at the same pace. Will the world in 1050 or 
2100 be owned by traders, top managers, and the superrich, or will it belong 
to the oil-producing countries or the Bank of China? Or perhaps it will be 
owned by the tax havens in which many of these actors will have sought ref¬ 
uge. It would be absurd not to raise the question of who will own what and 


15 


CAPITAL IN THE TWENTY-FIRST CENTURY 


simply to assume from the outset that growth is naturally “balanced” in the 
long run. 

In a way, we are in the same position at the beginning of the twenty-first 
century as our forebears were in the early nineteenth century: we are witness¬ 
ing impressive changes in economies around the world, and it is very difficult 
to know how extensive they will turn out to be or what the global distribu¬ 
tion of wealth, both within and between countries, will look like several de¬ 
cades from now. The economists of the nineteenth century deserve immense 
credit for placing the distributional question at the heart of economic analysis 
and for seeking to study long-term trends. Their answers were not always 
satisfactory, but at least they were asking the right questions. There is no fun¬ 
damental reason why we should believe that growth is automatically bal¬ 
anced. It is long since past the time when we should have put the question of 
inequality back at the center of economic analysis and begun asking questions 
first raised in the nineteenth century. For far too long, economists have ne¬ 
glected the distribution of wealth, partly because of Kuznets’s optimistic 
conclusions and partly because of the profession’s undue enthusiasm for sim¬ 
plistic mathematical models based on so-called representative agents. 18 If the 
question of inequality is again to become central, we must begin by gathering 
as extensive as possible a set of historical data for the purpose of understand¬ 
ing past and present trends. For it is by patiently establishing facts and pat¬ 
terns and then comparing different countries that we can hope to identify the 
mechanisms at work and gain a clearer idea of the future. 

The Sources Used in This Book 

This book is based on sources of two main types, which together make it pos¬ 
sible to study the historical dynamics of wealth distribution: sources dealing 
with the inequality and distribution of income, and sources dealing with the 
distribution of wealth and the relation of wealth to income. 

To begin with income: in large part, my work has simply broadened the 
spatial and temporal limits of Kuznets’s innovative and pioneering work on 
the evolution of income inequality in the United States between 1913 and 1948. 
In this way I have been able to put Kuznets’s findings (which are quite accu¬ 
rate) into a wider perspective and thus radically challenge his optimistic view 
of the relation between economic development and the distribution of wealth. 


16 


INTRODUCTION 


Oddly, no one has ever systematically pursued Kuznets’s work, no doubt in 
part because the historical and statistical study of tax records falls into a sort 
of academic no-man’s-land, too historical for economists and too economistic 
for historians. That is a pity, because the dynamics of income inequality can 
only be studied in a long-run perspective, which is possible only if one makes 
use of tax records . 19 

I began by extending Kuznets’s methods to France, and I published the 
results of that study in a book that appeared in 2001. 20 I then joined forces 
with several colleagues—Anthony Atkinson and Emmanuel Saez foremost 
among them—and with their help was able to expand the coverage to a much 
wider range of countries. Anthony Atkinson looked at Great Britain and a 
number of other countries, and together we edited two volumes that ap¬ 
peared in 2007 and 2010, in which we reported the results for some twenty 
countries throughout the world. 21 Together with Emmanuel Saez, I extended 
Kuznets’s series for the United States by half a century. 22 Saez himself looked 
at a number of other key countries, such as Canada and Japan. Many other 
investigators contributed to this joint effort: in particular, Facundo Alvaredo 
studied Argentina, Spain, and Portugal; Fabien Dell looked at Germany and 
Switzerland; and Abhijit Banerjeee and I investigated the Indian case. With 
the help of Nancy Qian I was able to work on China. And so on. 23 

In each case, we tried to use the same types of sources, the same methods, 
and the same concepts. Deciles and centiles of high incomes were estimated 
from tax data based on stated incomes (corrected in various ways to ensure 
temporal and geographic homogeneity of data and concepts). National in¬ 
come and average income were derived from national accounts, which in 
some cases had to be fleshed out or extended. Broadly speaking, our data se¬ 
ries begin in each country when an income tax was established (generally be¬ 
tween 1910 and 1920 but in some countries, such as Japan and Germany, as 
early as the 1880s and in other countries somewhat later). These series are 
regularly updated and at this writing extend to the early 2010s. 

Ultimately, the World Top Incomes Database (WTID), which is based 
on the joint work of some thirty researchers around the world, is the largest 
historical database available concerning the evolution of income inequality; it 
is the primary source of data for this book . 24 

The book’s second most important source of data, on which I will actually 
draw first, concerns wealth, including both the distribution of wealth and its 


17 


CAPITAL IN THE TWENTY-FIRST CENTURY 


relation to income. Wealth also generates income and is therefore important 
on the income study side of things as well. Indeed, income consists of two com¬ 
ponents: income from labor (wages, salaries, bonuses, earnings from nonwage 
labor, and other remuneration statutorily classified as labor related) and in¬ 
come from capital (rent, dividends, interest, profits, capital gains, royalties, 
and other income derived from the mere fact of owning capital in the form of 
land, real estate, financial instruments, industrial equipment, etc., again re¬ 
gardless of its precise legal classification). The WTID contains a great deal of 
information about the evolution of income from capital over the course of the 
twentieth century. It is nevertheless essential to complete this information by 
looking at sources directly concerned with wealth. Here I rely on three dis¬ 
tinct types of historical data and methodology, each of which is complemen¬ 
tary to the others . 25 

In the first place, just as income tax returns allow us to study changes in 
income inequality, estate tax returns enable us to study changes in the inequal¬ 
ity of wealth. 26 This approach was introduced by Robert Lampman in 1962 to 
study changes in the inequality of wealth in the United States from 1922 to 
1956. Later, in 1978, Anthony Atkinson and Alan Harrison studied the Brit¬ 
ish case from 1923 to 1972. 27 These results were recently updated and extended 
to other countries such as France and Sweden. Unfortunately, data are avail¬ 
able for fewer countries than in the case of income inequality. In a few cases, 
however, estate tax data extend back much further in time, often to the begin¬ 
ning of the nineteenth century, because estate taxes predate income taxes. In 
particular, I have compiled data collected by the French government at vari¬ 
ous times and, together with Gilles Postel-Vinay and Jean-Laurent Rosenthal, 
have put together a huge collection of individual estate tax returns, with 
which it has been possible to establish homogeneous series of data on the con¬ 
centration of wealth in France since the Revolution. 28 This will allow us to see 
the shocks due to World War I in a much broader context than the series deal¬ 
ing with income inequality (which unfortunately date back only as far as 1910 
or so). The work of Jesper Roine and Daniel Waldenstrom on Swedish histori¬ 
cal sources is also instructive. 29 

The data on wealth and inheritance also enable us to study changes in the 
relative importance of inherited wealth and savings in the constitution of 
fortunes and the dynamics of wealth inequality. This work is fairly complete 
in the case of France, where the very rich historical sources offer a unique 


18 


INTRODUCTION 


vantage point from which to observe changing inheritance patterns over 
the long run . 30 To one degree or another, my colleagues and I have extended 
this work to other countries, especially Great Britain, Germany, Sweden, 
and the United States. These materials play a crucial role in this study, be¬ 
cause the significance of inequalities of wealth differs depending on whether 
those inequalities derive from inherited wealth or savings. In this book, I fo¬ 
cus not only on the level of inequality as such but to an even greater extent on 
the structure of inequality, that is, on the origins of disparities in income and 
wealth between social groups and on the various systems of economic, social, 
moral, and political justification that have been invoked to defend or con¬ 
demn those disparities. Inequality is not necessarily bad in itself: the key 
question is to decide whether it is justified, whether there are reasons for it. 

Last but not least, we can also use data that allow us to measure the total 
stock of national wealth (including land, other real estate, and industrial and 
financial capital) over a very long period of time. We can measure this wealth 
for each country in terms of the number of years of national income required 
to amass it. This type of global study of the capital/income ratio has its limits. 
It is always preferable to analyze wealth inequality at the individual level as 
well, and to gauge the relative importance of inheritance and saving in capital 
formation. Nevertheless, the capital/income approach can give us an over¬ 
view of the importance of capital to the society as a whole. Moreover, in some 
cases (especially Britain and France) it is possible to collect and compare esti¬ 
mates for different periods and thus push the analysis back to the early eigh¬ 
teenth century, which allows us to view the Industrial Revolution in relation 
to the history of capital. For this I will rely on historical data Gabriel Zucman 
and I recently collected. 31 Broadly speaking, this research is merely an exten¬ 
sion and generalization of Raymond Goldsmith’s work on national balance 
sheets in the 1970s. 32 

Compared with previous works, one reason why this book stands out is 
that I have made an effort to collect as complete and consistent a set of histori¬ 
cal sources as possible in order to study the dynamics of income and wealth 
distribution over the long run. To that end, I had two advantages over previ¬ 
ous authors. First, this work benefits, naturally enough, from a longer historical 
perspective than its predecessors had (and some long-term changes did not 
emerge clearly until data for the 2000s became available, largely owing to the fact 
that certain shocks due to the world wars persisted for a very long time). Second, 


19 


CAPITAL IN THE TWENTY-FIRST CENTURY 


advances in computer technology have made it much easier to collect and 
process large amounts of historical data. 

Although I have no wish to exaggerate the role of technology in the his¬ 
tory of ideas, the purely technical issues are worth a moment’s reflection. Ob¬ 
jectively speaking, it was far more difficult to deal with large volumes of 
historical data in Kuznets’s time than it is today. This was true to a large ex¬ 
tent as recently as the 1980s. In the 1970s, when Alice Hanson Jones collected 
US estate inventories from the colonial era and Adeline Daumard worked on 
French estate records from the nineteenth century , 33 they worked mainly by 
hand, using index cards. When we reread their remarkable work today, or 
look at Francois Siminad’s work on the evolution of wages in the nineteenth 
century or Ernest Labrousse’s work on the history of prices and incomes in 
the eighteenth century or Jean Bouvier and Francois Furet’s work on the vari¬ 
ability of profits in the nineteenth century, it is clear that these scholars had 
to overcome major material difficulties in order to compile and process their 
data . 34 In many cases, the technical difficulties absorbed much of their energy, 
taking precedence over analysis and interpretation, especially since the tech¬ 
nical problems imposed strict limits on their ability to make international 
and temporal comparisons. It is much easier to study the history of the distri¬ 
bution of wealth today than in the past. This book is heavily indebted to re¬ 
cent improvements in the technology of research . 35 

The Major Results of This Study 

What are the major conclusions to which these novel historical sources have led 
me? The first is that one should be wary of any economic determinism in regard 
to inequalities of wealth and income. The history of the distribution of wealth 
has always been deeply political, and it cannot be reduced to purely economic 
mechanisms. In particular, the reduction of inequality that took place in most 
developed countries between 1910 and 1950 was above all a consequence of war 
and of policies adopted to cope with the shocks of war. Similarly, the resurgence 
of inequality after 1980 is due largely to the political shifts of the past several de¬ 
cades, especially in regard to taxation and finance. The history of inequality is 
shaped by the way economic, social, and political actors view what is just and 
what is not, as well as by the relative power of those actors and the collective 
choices that result. It is the joint product of all relevant actors combined. 


20 


INTRODUCTION 


The second conclusion, which is the heart of the book, is that the dynam¬ 
ics of wealth distribution reveal powerful mechanisms pushing alternately 
toward convergence and divergence. Furthermore, there is no natural, sponta¬ 
neous process to prevent destabilizing, inegalitarian forces from prevailing 
permanently. 

Consider first the mechanisms pushing toward convergence, that is, to¬ 
ward reduction and compression of inequalities. The main forces for conver¬ 
gence are the diffusion of knowledge and investment in training and skills. 
The law of supply and demand, as well as the mobility of capital and labor, 
which is a variant of that law, may always tend toward convergence as well, but 
the influence of this economic law is less powerful than the diffusion of 
knowledge and skill and is frequently ambiguous or contradictory in its im¬ 
plications. Knowledge and skill diffusion is the key to overall productivity 
growth as well as the reduction of inequality both within and between coun¬ 
tries. We see this at present in the advances made by a number of previously 
poor countries, led by China. These emergent economies are now in the pro¬ 
cess of catching up with the advanced ones. By adopting the modes of produc¬ 
tion of the rich countries and acquiring skills comparable to those found 
elsewhere, the less developed countries have leapt forward in productivity and 
increased their national incomes. The technological convergence process may 
be abetted by open borders for trade, but it is fundamentally a process of the 
diffusion and sharing of knowledge—the public good par excellence—rather 
than a market mechanism. 

From a strictly theoretical standpoint, other forces pushing toward greater 
equality might exist. One might, for example, assume that production tech¬ 
nologies tend over time to require greater skills on the part of workers, so 
that labor’s share of income will rise as capital’s share falls: one might call this 
the “rising human capital hypothesis.” In other words, the progress of tech¬ 
nological rationality is supposed to lead automatically to the triumph of hu¬ 
man capital over financial capital and real estate, capable managers over fat 
cat stockholders, and skill over nepotism. Inequalities would thus become 
more meritocratic and less static (though not necessarily smaller): economic 
rationality would then in some sense automatically give rise to democratic 
rationality. 

Another optimistic belief, which is current at the moment, is the idea that 
“class warfare” will automatically give way, owing to the recent increase in life 


21 


CAPITAL IN THE TWENTY-FIRST CENTURY 


expectancy, to “generational warfare” (which is less divisive because everyone 
is first young and then old). Put differently, this inescapable biological fact is 
supposed to imply that the accumulation and distribution of wealth no lon¬ 
ger presage an inevitable clash between dynasties of rentiers and dynasties 
owning nothing but their labor power. The governing logic is rather one of 
saving over the life cycle: people accumulate wealth when young in order to 
provide for their old age. Progress in medicine together with improved living 
conditions has therefore, it is argued, totally transformed the very essence of 
capital. 

Unfortunately, these two optimistic beliefs (the human capital hypothesis 
and the substitution of generational conflict for class warfare) are largely illu¬ 
sory. Transformations of this sort are both logically possible and to some ex¬ 
tent real, but their influence is far less consequential than one might imagine. 
There is little evidence that labor’s share in national income has increased 
significantly in a very long time: “nonhuman” capital seems almost as indis¬ 
pensable in the twenty-first century as it was in the eighteenth or nineteenth, 
and there is no reason why it may not become even more so. Now as in the 
past, moreover, inequalities of wealth exist primarily within age cohorts, and 
inherited wealth comes close to being as decisive at the beginning of the 
twenty-first century as it was in the age of Balzac’s Pere Goriot. Over a long 
period of time, the main force in favor of greater equality has been the diffu¬ 
sion ofknowledge and skills. 

Forces of Convergence, Forces of Divergence 

The crucial fact is that no matter how potent a force the diffusion of knowl¬ 
edge and skills may be, especially in promoting convergence between coun¬ 
tries, it can nevertheless be thwarted and overwhelmed by powerful forces 
pushing in the opposite direction, toward greater inequality. It is obvious that 
lack of adequate investment in training can exclude entire social groups from 
the benefits of economic growth. Growth can harm some groups while ben¬ 
efiting others (witness the recent displacement of workers in the more ad¬ 
vanced economies by workers in China). In short, the principal force for 
convergence—the diffusion ofknowledge—is only partly natural and sponta¬ 
neous. It also depends in large part on educational policies, access to training 
and to the acquisition of appropriate skills, and associated institutions. 


22 


INTRODUCTION 


I will pay particular attention in this study to certain worrisome forces of 
divergence—particularly worrisome in that they can exist even in a world 
where there is adequate investment in skills and where all the conditions of 
“market efficiency” (as economists understand that term) appear to be satis¬ 
fied. What are these forces of divergence? First, top earners can quickly sepa¬ 
rate themselves from the rest by a wide margin (although the problem to date 
remains relatively localized). More important, there is a set of forces of diver¬ 
gence associated with the process of accumulation and concentration of 
wealth when growth is weak and the return on capital is high. This second 
process is potentially more destabilizing than the first, and it no doubt repre¬ 
sents the principal threat to an equal distribution of wealth over the long run. 

To cut straight to the heart of the matter: in Figures I.i and 1 .2 I show two 
basic patterns that I will try to explain in what follows. Each graph represents 
the importance of one of these divergent processes. Both graphs depict “U-shaped 
curves,” that is, a period of decreasing inequality followed by one of increas¬ 
ing inequality. One might assume that the realities the two graphs represent 
are similar. In fact they are not. The phenomena underlying the various curves 
are quite different and involve distinct economic, social, and political pro¬ 
cesses. Furthermore, the curve in Figure I.i represents income inequality in the 
United States, while the curves in Figure 1 .2 depict the capital/income ratio in 
several European countries (Japan, though not shown, is similar). It is not out 
of the question that the two forces of divergence will ultimately come together 
in the twenty-first century. This has already happened to some extent and may 
yet become a global phenomenon, which could lead to levels of inequality 
never before seen, as well as to a radically new structure of inequality. Thus far, 
however, these striking patterns reflect two distinct underlying phenomena. 

The US curve, shown in Figure I.i, indicates the share of the upper decile 
of the income hierarchy in US national income from 1910 to 2010. It is noth¬ 
ing more than an extension of the historical series Kuznets established for the 
period 1913-1948. The top decile claimed as much as 45-50 percent of na¬ 
tional income in the 1910S-1920S before dropping to 30-35 percent by the end 
of the 1940s. Inequality then stabilized at that level from 1950 to 1970. We 
subsequently see a rapid rise in inequality in the 1980s, until by 2000 we have 
returned to a level on the order of 45-50 percent of national income. The 
magnitude of the change is impressive. It is natural to ask how far such a trend 
might continue. 


23 


Share of top decile in national income 


CAPITAL IN THE TWENTY-FIRST CENTURY 



FIGURE 1.1. Income inequality in the United States, 1910-2010 

The top decile share in US national income dropped from 45-50 percent in the 1910s- 
1920s to less than 35 percent in the 1950s (this is the fall documented by Kuznets); it 
then rose from less than 35 percent in the 1970s to 45-50 percent in the 2000S-2010S. 
Sources and series: see piketty.pse.ens.fr/capital21c. 


I will show that this spectacular increase in inequality largely reflects an 
unprecedented explosion of very elevated incomes front labor, a veritable sep¬ 
aration of the top managers of large firms from the rest of the population. 
One possible explanation of this is that the skills and productivity of these 
top managers rose suddenly in relation to those of other workers. Another 
explanation, which to me seems more plausible and turns out to be much 
more consistent with the evidence, is that these top managers by and large 
have the power to set their own remuneration, in some cases without limit 
and in many cases without any clear relation to their individual productivity, 
which in any case is very difficult to estimate in a large organization. This 
phenomenon is seen mainly in the United States and to a lesser degree in Brit¬ 
ain, and it may be possible to explain it in terms of the history of social and 
fiscal norms in those two countries over the past century. The tendency is less 
marked in other wealthy countries (such as Japan, Germany, France, and 
other continental European states), but the trend is in the same direction. To 
expect that the phenomenon will attain the same proportions elsewhere as it 
has done in the United States would be risky until we have subjected it to a 


24 




























INTRODUCTION 


full analysis—which unfortunately is not that simple, given the limits of the 
available data. 

The Fundamental Force for Divergence: r > g 

The second pattern, represented in Figure 1 . 2 , reflects a divergence mecha¬ 
nism that is in some ways simpler and more transparent and no doubt exerts 
greater influence on the long-run evolution of the wealth distribution. Figure 
1.2 shows the total value of private wealth (in real estate, financial assets, 
and professional capital, net of debt) in Britain, France and Germany, expressed 
in years of national income, for the period 1870-2010. Note, first of all, the very 
high level of private wealth in Europe in the late nineteenth century: the total 
amount of private wealth hovered around six or seven years of national income, 
which is a lot. It then fell sharply in response to the shocks of the period 1914- 
1945: the capital/income ratio decreased to just 2 or 3. We then observe a steady 
rise from 1950 on, a rise so sharp that private fortunes in the early twenty-first 
century seem to be on the verge of returning to five or six years of national in¬ 
come in both Britain and France. (Private wealth in Germany, which started at 
a lower level, remains lower, but the upward trend is just as clear.) 

This “U-shaped curve” reflects an absolutely crucial transformation, 
which will figure largely in this study. In particular, I will show that the re¬ 
turn of high capital/income ratios over the past few decades can be explained 
in large part by the return to a regime of relatively slow growth. In slowly 
growing economies, past wealth naturally takes on disproportionate impor¬ 
tance, because it takes only a small flow of new savings to increase the stock of 
wealth steadily and substantially. 

If, moreover, the rate of return on capital remains significantly above the 
growth rate for an extended period of time (which is more likely when 
the growth rate is low, though not automatic), then the risk of divergence in 
the distribution of wealth is very high. 

This fundamental inequality, which I will write as r > g (where r stands for 
the average annual rate of return on capital, including profits, dividends, in¬ 
terest, rents, and other income from capital, expressed as a percentage of its 
total value, and g stands for the rate of growth of the economy, that is, the 
annual increase in income or output), will play a crucial role in this book. In a 
sense, it sums up the overall logic of my conclusions. 


25 


Market value of private capital (% national income) 


CAPITAL IN THE TWENTY-FIRST CENTURY 



FIGURE 1.2. The capital/income ratio in Europe, 1870-2010 

Aggregate private wealth was worth about six to seven years of national income in 
Europe in 1910, between two and three years in 1950, and between four and six years 
in 2010. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


When the rate of return on capital significantly exceeds the growth rate of 
the economy (as it did through much of history until the nineteenth century 
and as is likely to be the case again in the twenty-first century), then it logi¬ 
cally follows that inherited wealth grows faster than output and income. 
People with inherited wealth need save only a portion of their income from 
capital to see that capital grow more quickly than the economy as a whole. 
Under such conditions, it is almost inevitable that inherited wealth will dom¬ 
inate wealth amassed from a lifetime’s labor by a wide margin, and the con¬ 
centration of capital will attain extremely high levels—levels potentially 
incompatible with the meritocratic values and principles of social justice fun¬ 
damental to modern democratic societies. 

What is more, this basic force for divergence can be reinforced by other 
mechanisms. For instance, the savings rate may increase sharply with wealth . 36 
Or, even more important, the average effective rate of return on capital may 
be higher when the individual’s initial capital endowment is higher (as ap¬ 
pears to be increasingly common). The fact that the return on capital is un- 


26 


































INTRODUCTION 


predictable and arbitrary, so that wealth can be enhanced in a variety of ways, 
also poses a challenge to the meritocratic model. Finally, all of these factors 
can be aggravated by the Ricardian scarcity principle: the high price of real 
estate or petroleum may contribute to structural divergence. 

To sum up what has been said thus far: the process by which wealth is ac¬ 
cumulated and distributed contains powerful forces pushing toward diver¬ 
gence, or at any rate toward an extremely high level of inequality. Forces of 
convergence also exist, and in certain countries at certain times, these may 
prevail, but the forces of divergence can at any point regain the upper hand, as 
seems to be happening now, at the beginning of the twenty-first century. The 
likely decrease in the rate of growth of both the population and the economy 
in coming decades makes this trend all the more worrisome. 

My conclusions are less apocalyptic than those implied by Marx’s prin¬ 
ciple of infinite accumulation and perpetual divergence (since Marx’s the¬ 
ory implicitly relies on a strict assumption of zero productivity growth over 
the long run). In the model I propose, divergence is not perpetual and is 
only one of several possible future directions for the distribution of wealth. 
But the possibilities are not heartening. Specifically, it is important to note 
that the fundamental r>g inequality, the main force of divergence in my 
theory, has nothing to do with any market imperfection. Quite the con¬ 
trary: the more perfect the capital market (in the economist’s sense), the 
more likely r is to be greater than^. It is possible to imagine public institu¬ 
tions and policies that would counter the effects of this implacable logic: for 
instance, a progressive global tax on capital. But establishing such institutions 
and policies would require a considerable degree of international coordination. 
It is unfortunately likely that actual responses to the problem—including 
various nationalist responses—will in practice be far more modest and less 
effective. 

The Geographical and Historical Boundaries of This Study 

What will the geographical and historical boundaries of this study be? To the 
extent possible, I will explore the dynamics of the distribution of wealth be¬ 
tween and within countries around the world since the eighteenth century. 
However, the limitations of the available data will often make it necessary to 
narrow the scope of inquiry rather severely. In regard to the between-country 


27 


CAPITAL IN THE TWENTY-FIRST CENTURY 


distribution of output and income, the subject of the first part of the book, a 
global approach is possible from 1700 on (thanks in particular to the national 
accounts data compiled by Angus Maddison). When it comes to studying the 
capital/income ratio and capital-labor split in Part Two, the absence of ade¬ 
quate historical data will force me to focus primarily on the wealthy countries 
and proceed by extrapolation to poor and emerging countries. The examina¬ 
tion of the evolution of inequalities of income and wealth, the subject of Part 
Three, will also be narrowly constrained by the limitations of the available 
sources. I try to include as many poor and emergent countries as possible, us¬ 
ing data from the WTID, which aims to cover five continents as thoroughly 
as possible. Nevertheless, the long-term trends are far better documented in 
the rich countries. To put it plainly, this book relies primarily on the histori¬ 
cal experience of the leading developed countries: the United States, Japan, 
Germany, France, and Great Britain. 

The British and French cases turn out to be particularly significant, be¬ 
cause the most complete long-run historical sources pertain to these two 
countries. We have multiple estimates of both the magnitude and structure of 
national wealth for Britain and France as far back as the early eighteenth cen¬ 
tury. These two countries were also the leading colonial and financial powers 
in the nineteenth and early twentieth centuries. It is therefore clearly impor¬ 
tant to study them if we wish to understand the dynamics of the global distri¬ 
bution of wealth since the Industrial Revolution. In particular, their history is 
indispensable for studying what has been called the “first globalization” of fi¬ 
nance and trade (1870-1914), a period that is in many ways similar to the 
“second globalization,” which has been under way since the 1970s. The period 
of the first globalization is as fascinating as it was prodigiously inegalitarian. 
It saw the invention of the electric light as well as the heyday of the ocean 
liner (the Titanic sailed in 1912.), the advent of film and radio, and the rise of 
the automobile and international investment. Note, for example, that it was 
not until the coming of the twenty-first century that the wealthy countries 
regained the same level of stock-market capitalization relative to GDP that 
Paris and London achieved in the early 1900s. This comparison is quite in¬ 
structive for understanding today’s world. 

Some readers will no doubt be surprised that I accord special importance 
to the study of the French case and may suspect me of nationalism. I should 


28 


INTRODUCTION 


therefore justify my decision. One reason for my choice has to do with sources. 
The French Revolution did not create a just or ideal society, but it did make it 
possible to observe the structure of wealth in unprecedented detail. The sys¬ 
tem established in the 1790s for recording wealth in land, buildings, and fi¬ 
nancial assets was astonishingly modern and comprehensive for its time. The 
Revolution is the reason why French estate records are probably the richest in 
the world over the long run. 

My second reason is that because France was the first country to experience 
the demographic transition, it is in some respects a good place to observe what 
awaits the rest of the planet. Although the country’s population has increased 
over the past two centuries, the rate of increase has been relatively low. The 
population of the country was roughly 30 million at the time of the Revolution, 
and it is slightly more than 60 million today. It is the same country, with a 
population whose order of magnitude has not changed. By contrast, the popula¬ 
tion of the United States at the time of the Declaration of Independence was 
barely 3 million. By 1900 it was 100 million, and today it is above 300 million. 
When a country goes from a population of 3 million to a population of 300 mil¬ 
lion (to say nothing of the radical increase in territory owing to westward ex¬ 
pansion in the nineteenth century), it is clearly no longer the same country. 

The dynamics and structure of inequality look very different in a country 
whose population increases by a factor of 100 compared with a country whose 
population merely doubles. In particular, the inheritance factor is much less 
important in the former than in the latter. It has been the demographic 
growth of the New World that has ensured that inherited wealth has always 
played a smaller role in the United States than in Europe. This factor also ex¬ 
plains why the structure of inequality in the United States has always been so 
peculiar, and the same can be said of US representations of inequality and 
social class. But it also suggests that the US case is in some sense not generaliz- 
able (because it is unlikely that the population of the world will increase a 
hundredfold over the next two centuries) and that the French case is more 
typical and more pertinent for understanding the future. I am convinced that 
detailed analysis of the French case, and more generally of the various histori¬ 
cal trajectories observed in other developed countries in Europe, Japan, North 
America, and Oceania, can tell us a great deal about the future dynamics 
of global wealth, including such emergent economies as China, Brazil, and 


29 


CAPITAL IN THE TWENTY-FIRST CENTURY 


India, where demographic and economic growth will undoubtedly slow in 
the future (as they have done already). 

Finally, the French case is interesting because the French Revolution—the 
“bourgeois” revolution par excellence—quickly established an ideal of legal 
equality in relation to the market. It is interesting to look at how this ideal 
affected the dynamics of wealth distribution. Although the English Revolu¬ 
tion of 1688 established modern parliamentarism, it left standing a royal dy¬ 
nasty, primogeniture on landed estates (ended only in the 1920s), and political 
privileges for the hereditary nobility (reform of the House of Lords is still 
under discussion, a bit late in the day). Although the American Revolution 
established the republican principle, it allowed slavery to continue for nearly a 
century and legal racial discrimination for nearly two centuries. The race 
question still has a disproportionate influence on the social question in the 
United States today. In a way, the French Revolution of 1789 was more ambi¬ 
tious. It abolished all legal privileges and sought to create a political and social 
order based entirely on equality of rights and opportunities. The Civil Code 
guaranteed absolute equality before the laws of property as well as freedom of 
contract (for men, at any rate). In the late nineteenth century, conservative 
French economists such as Paul Leroy-Beaulieu often used this argument to 
explain why republican France, a nation of “small property owners” made 
egalitarian by the Revolution, had no need of a progressive or confiscatory in¬ 
come tax or estate tax, in contrast to aristocratic and monarchical Britain. The 
data show, however, that the concentration of wealth was as large at that time 
in France as in Britain, which clearly demonstrates that equality of rights in 
the marketplace cannot ensure equality of rights tout court. Here again, the 
French experience is quite relevant to today’s world, where many commenta¬ 
tors continue to believe, as Leroy-Beaulieu did a little more than a century ago, 
that ever more fully guaranteed property rights, ever freer markets, and ever 
“purer and more perfect” competition are enough to ensure a just, prosperous, 
and harmonious society. Unfortunately, the task is more complex. 

The Theoretical and Conceptual Framework 

Before proceeding, it may be useful to say a little more about the theoretical 
and conceptual framework of this research as well as the intellectual itinerary 
that led me to write this book. 


30 


INTRODUCTION 


I belong to a generation that turned eighteen in 1989, which was not only 
the bicentennial of the French Revolution but also the year when the Berlin 
Wall fell. I belong to a generation that came of age listening to news of the 
collapse of the Communist dicatorships and never felt the slightest affection 
or nostalgia for those regimes or for the Soviet Union. I was vaccinated for life 
against the conventional but lazy rhetoric of anticapitalism, some of which 
simply ignored the historic failure of Communism and much of which turned 
its back on the intellectual means necessary to push beyond it. I have no inter¬ 
est in denouncing inequality or capitalism per se—especially since social in¬ 
equalities are not in themselves a problem as long as they are justified, that is, 
“founded only upon common utility,” as article 1 of the 1789 Declaration of 
the Rights of Man and the Citizen proclaims. (Although this definition of so¬ 
cial justice is imprecise but seductive, it is rooted in history. Let us accept it for 
now. I will return to this point later on.) By contrast, I am interested in con¬ 
tributing, however modestly, to the debate about the best way to organize so¬ 
ciety and the most appropriate institutions and policies to achieve a just social 
order. Furthermore, I would like to see justice achieved effectively and effi¬ 
ciently under the rule of law, which should apply equally to all and derive 
from universally understood statutes subject to democratic debate. 

I should perhaps add that I experienced the American dream at the age of 
twenty-two, when I was hired by a university near Boston just after finishing 
my doctorate. This experience proved to be decisive in more ways than one. It 
was the first time I had set foot in the United States, and it felt good to have 
my work recognized so quickly. Here was a country that knew how to attract 
immigrants when it wanted to! Yet I also realized quite soon that I wanted to 
return to France and Europe, which I did when I was twenty-five. Since then, 
I have not left Paris, except for a few brief trips. One important reason for my 
choice has a direct bearing on this book: I did not find the work of US econo¬ 
mists entirely convincing. To be sure, they were all very intelligent, and I still 
have many friends from that period of my life. But something strange hap¬ 
pened: I was only too aware of the fact that I knew nothing at all about the 
world’s economic problems. My thesis consisted of several relatively abstract 
mathematical theorems. Yet the profession liked my work. I quickly realized 
that there had been no significant effort to collect historical data on the dy¬ 
namics of inequality since Kuznets, yet the profession continued to churn out 
purely theoretical results without even knowing what facts needed to be 


3i 


CAPITAL IN THE TWENTY-FIRST CENTURY 


explained. And it expected me to do the same. When I returned to France, I 
set out to collect the missing data. 

To put it bluntly, the discipline of economics has yet to get over its child¬ 
ish passion for mathematics and for purely theoretical and often highly ideo¬ 
logical speculation, at the expense of historical research and collaboration 
with the other social sciences. Economists are all too often preoccupied with 
petty mathematical problems of interest only to themselves. This obsession 
with mathematics is an easy way of acquiring the appearance of scientificity 
without having to answer the far more complex questions posed by the world 
we live in. There is one great advantage to being an academic economist in 
France: here, economists are not highly respected in the academic and intel¬ 
lectual world or by political and financial elites. Hence they must set aside 
their contempt for other disciplines and their absurd claim to greater scien¬ 
tific legitimacy, despite the fact that they know almost nothing about any¬ 
thing. This, in any case, is the charm of the discipline and of the social sci¬ 
ences in general: one starts from square one, so that there is some hope of 
making major progress. In France, I believe, economists are slightly more inter¬ 
ested in persuading historians and sociologists, as well as people outside the 
academic world, that what they are doing is interesting (although they are not 
always successful). My dream when I was teaching in Boston was to teach at 
the Ecole des Hautes Etudes en Sciences Sociales, whose faculty has included 
such leading lights as Lucien Febvre, Fernand Braudel, Claude Levi-Strauss, 
Pierre Bourdieu, Framboise Heritier, and Maurice Godelier, to name a few. 
Dare I admit this, at the risk of seeming chauvinistic in my view of the social 
sciences? I probably admire these scholars more than Robert Solow or even 
Simon Kuznets, even though I regret the fact that the social sciences have 
largely lost interest in the distribution of wealth and questions of social class 
since the 1970s. Before that, statistics about income, wages, prices, and wealth 
played an important part in historical and sociological research. In any case, I 
hope that both professional social scientists and amateurs of all fields will find 
something of interest in this book, starting with those who claim to “know 
nothing about economics” but who nevertheless have very strong opinions 
about inequality of income and wealth, as is only natural. 

The truth is that economics should never have sought to divorce itself 
from the other social sciences and can advance only in conjunction with them. 
The social sciences collectively know too little to waste time on foolish disci- 


32 


INTRODUCTION 


plinary squabbles. If we are to progress in our understanding of the historical 
dynamics of the wealth distribution and the structure of social classes, we 
must obviously take a pragmatic approach and avail ourselves of the methods 
of historians, sociologists, and political scientists as well as economists. We 
must start with fundamental questions and try to answer them. Disciplinary 
disputes and turf wars are of little or no importance. In my mind, this book is 
as much a work of history as of economics. 

As I explained earlier, I began this work by collecting sources and estab¬ 
lishing historical time series pertaining to the distribution of income and 
wealth. As the book proceeds, I sometimes appeal to theory and to abstract 
models and concepts, but I try to do so sparingly, and only to the extent that 
theory enhances our understanding of the changes we observe. For example, 
income, capital, the economic growth rate, and the rate of return on capital 
are abstract concepts—theoretical constructs rather than mathematical cer¬ 
tainties. Yet I will show that these concepts allow us to analyze historical real¬ 
ity in interesting ways, provided that we remain clear-eyed and critical about 
the limited precision with which we can measure these things. I will also use 
a few equations, such as a = r x |3 (which says that the share of capital in na¬ 
tional income is equal to the product of the return on capital and the capital/ 
income ratio), or /3 = s/g (which says that the capital/income ratio is equal in 
the long run to the savings rate divided by the growth rate). I ask readers not 
well versed in mathematics to be patient and not immediately close the book: 
these are elementary equations, which can be explained in a simple, intuitive 
way and can be understood without any specialized technical knowledge. 
Above all, I try to show that this minimal theoretical framework is sufficient 
to give a clear account of what everyone will recognize as important historical 
developments. 


Outline of the Book 

The remainder of the book consists of sixteen chapters divided into four 
parts. Part One, titled “Income and Capital,” contains two chapters and in¬ 
troduces basic ideas that are used repeatedly in the remainder of the book. 
Specifically, Chapter i presents the concepts of national income, capital, and 
the capital/income ratio and then describes in broad brushstrokes how the 
global distribution of income and output has evolved. Chapter 2 gives a more 


33 


CAPITAL IN THE TWENTY-FIRST CENTURY 


detailed analysis of how the growth rates of population and output have 
evolved since the Industrial Revolution. This first part of the book contains 
nothing really new, and the reader familiar with these ideas and with the his¬ 
tory of global growth since the eighteenth century may wish to skip directly 
to Part Two. 

The purpose of Part Two, titled “The Dynamics of the Capital/Income 
Ratio,” which consists of four chapters, is to examine the prospects for the 
long-run evolution of the capital/income ratio and the global division of na¬ 
tional income between labor and capital in the twenty-first century. Chapter 3 
looks at the metamorphoses of capital since the eighteenth century, starting 
with the British and French cases, about which we possess the most data over 
the long run. Chapter 4 introduces the German and US cases. Chapters 5 and 
6 extend the geographical range of the analysis to the entire planet, insofar as 
the sources allow, and seek to draw the lessons from all of these historical expe¬ 
riences that can enable us to anticipate the possible evolution of the capital/ 
income ratio and the relative shares of capital and labor in the decades to come. 

Part Three, titled “The Structure of Inequality,” consists of six chapters. 
Chapter 7 familiarizes the reader with the orders of magnitude of inequality 
attained in practice by the distribution of income from labor on the one hand 
and of capital ownership and income from capital on the other. Chapter 8 
then analyzes the historical dynamics of these inequalities, starting with a 
comparison of France and the United States. Chapters 9 and 10 extend the 
analysis to all the countries for which we have historical data (in the WTID), 
looking separately at inequalities related to labor and capital, respectively. 
Chapter 11 studies the changing importance of inherited wealth over the long 
run. Finally, Chapter 11 looks at the prospects for the global distribution of 
wealth over the first few decades of the twenty-first century. 

The purpose of Part Four, titled “Regulating Capital in the Twenty-First 
Century” and consisting of four chapters, is to draw normative and policy les¬ 
sons from the previous three parts, whose purpose is primarily to establish 
the facts and understand the reasons for the observed changes. Chapter 13 
examines what a “social state” suited to present conditions might look like. 
Chapter 14 proposes a rethinking of the progressive income tax based on past 
experience and recent trends. Chapter 15 describes what a progressive tax on 
capital adapted to twenty-first century conditions might look like and com¬ 
pares this idealized tool to other types of regulation that might emerge from 


34 


INTRODUCTION 


the political process, ranging from a wealth tax in Europe to capital controls 
in China, immigration reform in the United States, and revival of protection¬ 
ism in many countries. Chapter 16 deals with the pressing question of public 
debt and the related issue of the optimal accumulation of public capital at a 
time when natural capital may be deteriorating. 

One final word. It would have been quite presumptuous in 1913 to publish 
a book called “Capital in the Twentieth Century.” I beg the reader’s indul¬ 
gence for giving the title Capital in the Twenty-First Century to this book, 
which appeared in French in 2013 and in English in 2014 .1 am only too well 
aware of my total inability to predict what form capital will take in 2063 or 
2113. As I already noted, and as I will frequently show in what follows, the his¬ 
tory of income and wealth is always deeply political, chaotic, and unpredict¬ 
able. How this history plays out depends on how societies view inequalities 
and what kinds of policies and institutions they adopt to measure and trans¬ 
form them. No one can foresee how these things will change in the decades to 
come. The lessons of history are nevertheless useful, because they help us to 
see a little more clearly what kinds of choices we will face in the coming cen¬ 
tury and what sorts of dynamics will be at work. The sole purpose of the 
book, which logically speaking should have been entitled “Capital at the Dawn 
of the Twenty-First Century,” is to draw from the past a few modest keys to the 
future. Since history always invents its own pathways, the actual usefulness of 
these lessons from the past remains to be seen. I offer them to readers without 
presuming to know their full import. 


35 



PART ONE 


INCOME AND CAPITAL 




{ ONE } 


Income and Output 


On August 1 6, ion, the South African police intervened in a labor conflict 
between workers at the Marikana platinum mine near Johannesburg and the 
mine’s owners: the stockholders of Lonmin, Inc., based in London. Police 
fired on the strikers with live ammunition. Thirty-four miners were killed. 1 
As often in such strikes, the conflict primarily concerned wages: the miners had 
asked for a doubling of their wage from 500 to 1,000 euros a month. After the 
tragic loss of life, the company finally proposed a monthly raise of 75 euros. 2 

This episode reminds us, if we needed reminding, that the question of 
what share of output should go to wages and what share to profits—in other 
words, how should the income from production be divided between labor 
and capital?—has always been at the heart of distributional conflict. In tradi¬ 
tional societies, the basis of social inequality and most common cause of re¬ 
bellion was the conflict of interest between landlord and peasant, between 
those who owned land and those who cultivated it with their labor, those who 
received land rents and those who paid them. The Industrial Revolution exac¬ 
erbated the conflict between capital and labor, perhaps because production 
became more capital intensive than in the past (making use of machinery and 
exploiting natural resources more than ever before) and perhaps, too, because 
hopes for a more equitable distribution of income and a more democratic so¬ 
cial order were dashed. I will come back to this point. 

The Marikana tragedy calls to mind earlier instances of violence. At Hay- 
market Square in Chicago on May 1,1886, and then at Fourmies, in northern 
France, on May 1,1891, police fired on workers striking for higher wages. Does 
this kind of violent clash between labor and capital belong to the past, or will 
it be an integral part of twenty-first-century history? 

The first two parts of this book focus on the respective shares of global 
income going to labor and capital and on how those shares have changed since 
the eighteenth century. I will temporarily set aside the issue of income inequal¬ 
ity between workers (for example, between an ordinary worker, an engineer, 


39 


INCOME AND CAPITAL 


and a plant manager) and between capitalists (for example, between small, me¬ 
dium, and large stockholders or landlords) until Part Three. Clearly, each of 
these two dimensions of the distribution of wealth—the “factorial” distribu¬ 
tion in which labor and capital are treated as “factors of production,” viewed in 
the abstract as homogeneous entities, and the “individual” distribution, which 
takes account of inequalities of income from labor and capital at the individual 
level—is in practice fundamentally important. It is impossible to achieve a satis¬ 
factory understanding of the distributional problem without analyzing both . 3 

In any case, the Marikana miners were striking not only against what they 
took to be Lonmin’s excessive profits but also against the apparently fabulous 
salary awarded to the mine’s manager and the difference between his com¬ 
pensation and theirs . 4 Indeed, if capital ownership were equally distributed 
and each worker received an equal share of profits in addition to his or her 
wages, virtually no one would be interested in the division of earnings be¬ 
tween profits and wages. If the capital-labor split gives rise to so many con¬ 
flicts, it is due first and foremost to the extreme concentration of the own¬ 
ership of capital. Inequality of wealth—and of the consequent income from 
capital—is in fact always much greater than inequality of income from labor. 
I will analyze this phenomenon and its causes in Part Three. For now, I will 
take the inequality of income from labor and capital as given and focus on the 
global division of national income between capital and labor. 

To be clear, my purpose here is not to plead the case of workers against 
owners but rather to gain as clear as possible a view of reality. Symbolically, 
the inequality of capital and labor is an issue that arouses strong emotions. It 
clashes with widely held ideas of what is and is not just, and it is hardly sur¬ 
prising if this sometimes leads to physical violence. For those who own noth¬ 
ing but their labor power and who often live in humble conditions (not to say 
wretched conditions in the case of eighteenth-century peasants or the Mari¬ 
kana miners), it is difficult to accept that the owners of capital—some of 
whom have inherited at least part of their wealth—are able to appropriate so 
much of the wealth produced by their labor. Capital’s share can be quite large: 
often as much as one-quarter of total output and sometimes as high as one- 
half in capital-intensive sectors such as mining, or even more where local mo¬ 
nopolies allow the owners of capital to demand an even larger share. 

Of course, everyone can also understand that if all the company’s earnings 
from its output went to paying wages and nothing to profits, it would proba- 


40 


INCOME AND OUTPUT 


bly be difficult to attract the capital needed to finance new investments, at 
least as our economies are currently organized (to be sure, one can imagine 
other forms of organization). Furthermore, it is not necessarily just to deny 
any remuneration to those who choose to save more than others—assuming, 
of course, that differences in saving are an important reason for the inequality 
of wealth. Bear in mind, too, that a portion of what is called “the income of 
capital” may be remuneration for “entrepreneurial” labor, and this should no 
doubt be treated as we treat other forms of labor. This classic argument de¬ 
serves closer scrutiny. Taking all these elements into account, what is the 
“right” split between capital and labor? Can we be sure that an economy based 
on the “free market” and private property always and everywhere leads to an 
optimal division, as if by magic? In an ideal society, how would one arrange 
the division between capital and labor? How should one think about the 
problem? 

The Capital-Labor Split in the Long Run: Not So Stable 

If this study is to make even modest progress on these questions and at least 
clarify the terms of a debate that appears to be endless, it will be useful to be¬ 
gin by establishing some facts as accurately and carefully as possible. What 
exactly do we know about the evolution of the capital-labor split since the 
eighteenth century? For a long time, the idea accepted by most economists 
and uncritically repeated in textbooks was that the relative shares of labor and 
capital in national income were quite stable over the long run, with the gener¬ 
ally accepted figure being two-thirds for labor and one-third for capital . 5 To¬ 
day, with the advantage of greater historical perspective and newly available 
data, it is clear that the reality was quite a bit more complex. 

For one thing, the capital-labor split varied widely over the course of the 
twentieth century. The changes observed in the nineteenth century, which I 
touched on in the Introduction (an increase in the capital share in the first 
half of the century, followed by a slight decrease and then a period of stabil¬ 
ity), seem mild by comparison. Briefly, the shocks that buffeted the economy 
in the period 1914-1945— World War I, the Bolshevik Revolution of 1917, the 
Great Depression, World War II, and the consequent advent of new regula¬ 
tory and tax policies along with controls on capital—reduced capital’s share 
of income to historically low levels in the 1950s. Very soon, however, capital 


4i 


INCOME AND CAPITAL 


began to reconstitute itself. The growth of capital’s share accelerated with the 
victories of Margaret Thatcher in England in 1979 and Ronald Reagan in the 
United States in 1980, marking the beginning of a conservative revolution. 
Then came the collapse of the Soviet bloc in 1989, followed by financial glo¬ 
balization and deregulation in the 1990s. All of these events marked a politi¬ 
cal turn in the opposite direction from that observed in the first half of the 
twentieth century. By 2010, and despite the crisis that began in 2007-2008, 
capital was prospering as it had not done since 1913. Not all of the conse¬ 
quences of capital’s renewed prosperity were negative; to some extent it was a 
natural and desirable development. But it has changed the way we look at the 
capital-labor split since the beginning of the twenty-first century, as well as 
our view of changes likely to occur in the decades to come. 

Furthermore, if we look beyond the twentieth century and adopt a very 
long-term view, the idea of a stable capital-labor split must somehow deal with 
the fact that the nature of capital itself has changed radically (from land and 
other real estate in the eighteenth century to industrial and financial capital 
in the twenty-first century). There is also the idea, widespread among econo¬ 
mists, that modern economic growth depends largely on the rise of “human 
capital.” At first glance, this would seem to imply that labor should claim a 
growing share of national income. And one does indeed find that there may be 
a tendency for labor’s share to increase over the very long run, but the gains are 
relatively modest: capital’s share (excluding human capital) in the early decades 
of the twenty-first century is only slightly smaller than it was at the beginning 
of the nineteenth century. The importance of capital in the wealthy countries 
today is primarily due to a slowing of both demographic growth and productiv¬ 
ity growth, coupled with political regimes that objectively favor private capital. 

The most fruitful way to understand these changes is to analyze the evolu¬ 
tion of the capital/income ratio (that is, the ratio of the total stock of capital 
to the annual flow of income) rather than focus exclusively on the capital- 
labor split (that is, the share of income going to capital and labor, respec¬ 
tively). In the past, scholars have mainly studied the latter, largely owing to 
the lack of adequate data to do anything else. 

Before presenting my results in detail, it is best to proceed by stages. The 
purpose of Part One of this book is to introduce certain basic notions. In the 
remainder of this chapter, I will begin by presenting the concepts of domestic 
product and national income, capital and labor, and the capital/income ratio. 


42 


INCOME AND OUTPUT 


Then I will look at how the global distribution of income has changed since 
the Industrial Revolution. In Chapter 2, I will analyze the general evolution 
of growth rates over time. This will play a central role in the subsequent 
analysis. 

With these preliminaries out of the way, Part Two takes up the dynamics 
of the capital/income ratio and the capital-labor split, once again proceeding 
by stages. Chapter 3 will look at changes in the composition of capital and the 
capital/income ratio since the eighteenth century, beginning with Britain 
and France, about which we have the best long-run data. Chapter 4 intro¬ 
duces the German case and above all looks at the United States, which serves 
as a useful complement to the European prism. Finally, Chapters 5 and 6 at¬ 
tempt to extend the analysis to all the rich countries of the world and, insofar 
as possible, to the entire planet. I also attempt to draw conclusions relevant to 
the global dynamics of the capital/income ratio and capital-labor split in the 
twenty-first century. 


The Idea of National Income 

It will be useful to begin with the concept of “national income,” to which I 
will frequently refer in what follows. National income is defined as the sum of 
all income available to the residents of a given country in a given year, regard¬ 
less of the legal classification of that income. 

National income is closely related to the idea of GDP, which comes up 
often in public debate. There are, however, two important differences be¬ 
tween GDP and national income. GDP measures the total of goods and ser¬ 
vices produced in a given year within the borders of a given country. In order 
to calculate national income, one must first subtract from GDP the deprecia¬ 
tion of the capital that made this production possible: in other words, one must 
deduct wear and tear on buildings, infrastructure, machinery, vehicles, comput¬ 
ers, and other items during the year in question. This depreciation is substantial, 
today on the order of 10 percent of GDP in most countries, and it does not 
correspond to anyone’s income: before wages are distributed to workers or 
dividends to stockholders, and before genuinely new investments are made, 
worn-out capital must be replaced or repaired. If this is not done, wealth is 
lost, resulting in negative income for the owners. When depreciation is sub¬ 
tracted from GDP, one obtains the “net domestic product,” which I will refer 


43 


INCOME AND CAPITAL 


to more simply as “domestic output” or “domestic production,” which is typi¬ 
cally 90 percent of GDP. 

Then one must add net income received from abroad (or subtract net in¬ 
come paid to foreigners, depending on each country’s situation). For example, 
a country whose firms and other capital assets are owned by foreigners may 
well have a high domestic product but a much lower national income, once prof¬ 
its and rents flowing abroad are deducted from the total. Conversely, a country 
that owns a large portion of the capital of other countries may enjoy a national 
income much higher than its domestic product. 

Later I will give examples of both of these situations, drawn from the his¬ 
tory of capitalism as well as from today’s world. I should say at once that this 
type of international inequality can give rise to great political tension. It is 
not an insignificant thing when one country works for another and pays out a 
substantial share of its output as dividends and rent to foreigners over a long 
period of time. In many cases, such a system can survive (to a point) only if 
sustained by relations of political domination, as was the case in the colonial 
era, when Europe effectively owned much of the rest of the world. A key ques¬ 
tion of this research is the following: Under what conditions is this type of 
situation likely to recur in the twenty-first century, possibly in some novel 
geographic configuration? For example, Europe, rather than being the owner, 
may find itself owned. Such fears are currently widespread in the Old World— 
perhaps too widespread. We shall see. 

At this stage, suffice it to say that most countries, whether wealthy or emer¬ 
gent, are currently in much more balanced situations than one sometimes imag¬ 
ines. In France as in the United States, Germany as well as Great Britain, China 
as well as Brazil, and Japan as well as Italy, national income is within ion per¬ 
cent of domestic product. In all these countries, in other words, the inflow of 
profits, interest, dividends, rent, and so on is more or less balanced by a compa¬ 
rable outflow. In wealthy countries, net income from abroad is generally slightly 
positive. To a first approximation, the residents of these countries own as much 
in foreign real estate and financial instruments as foreigners own of theirs. Con¬ 
trary to a tenacious myth, France is not owned by California pension funds or 
the Bank of China, any more than the United States belongs to Japanese and 
German investors. The fear of getting into such a predicament is so strong today 
that fantasy often outstrips reality. The reality is that inequality with respect to 
capital is a far greater domestic issue than it is an international one. Inequality 
in the ownership of capital brings the rich and poor within each country into 


44 


INCOME AND OUTPUT 


conflict with one another far more than it pits one country against another. 
This has not always been the case, however, and it is perfectly legitimate to ask 
whether our future may not look more like our past, particularly since certain 
countries—Japan, Germany, the oil-exporting countries, and to a lesser degree 
China—have in recent years accumulated substantial claims on the rest of the 
world (though by no means as large as the record claims of the colonial era). 
Furthermore, the very substantial increase in cross-ownership, in which various 
countries own substantial shares of one another, can give rise to a legitimate 
sense of dispossession, even when net asset positions are close to zero. 

To sum up, a country’s national income may be greater or smaller than its 
domestic product, depending on whether net income from abroad is positive 
or negative. 

National income = domestic output + net income from abroad 6 

At the global level, income received from abroad and paid abroad must 
balance, so that income is by definition equal to output: 

Global income = global output 7 

This equality between two annual flows, income and output, is an ac¬ 
counting identity, yet it reflects an important reality. In any given year, it is 
impossible for total income to exceed the amount of new wealth that is pro¬ 
duced (globally speaking; a single country may of course borrow front abroad). 
Conversely, all production must be distributed as income in one form or another, 
to either labor or capital: whether as wages, salaries, honoraria, bonuses, and so 
on (that is, as payments to workers and others who contributed labor to the pro¬ 
cess of production) or else as profits, dividends, interest, rents, royalties, and so on 
(that is, as payments to the owners of capital used in the process of production). 

What Is Capital? 

To recapitulate: regardless of whether we are looking at the accounts of a 
company, a nation, or the global economy, the associated output and income 
can be decomposed as the sum of income to capital and income to labor: 

National income = capital income + labor income 


45 


INCOME AND CAPITAL 


But what is capital? What are its limits? What forms does it take? How 
has its composition changed over time? This question, central to this investi¬ 
gation, will be examined in greater detail in subsequent chapters. For now it 
will suffice to make the following points: 

First, throughout this book, when I speak of “capital” without further 
qualification, I always exclude what economists often call (unfortunately, to 
my mind) “human capital,” which consists of an individual’s labor power, 
skills, training, and abilities. In this book, capital is defined as the sum total 
of nonhuman assets that can be owned and exchanged on some market. Capi¬ 
tal includes all forms of real property (including residential real estate) as well 
as financial and professional capital (plants, infrastructure, machinery, pat¬ 
ents, and so on) used by firms and government agencies. 

There are many reasons for excluding human capital from our definition 
of capital. The most obvious is that human capital cannot be owned by an¬ 
other person or traded on a market (not permanently, at any rate). This is a 
key difference from other forms of capital. One can of course put one’s labor 
services up for hire under a labor contract of some sort. In all modern legal 
systems, however, such an arrangement has to be limited in both time and 
scope. In slave societies, of course, this is obviously not true: there, a slave¬ 
holder can fully and completely own the human capital of another person and 
even of that person’s offspring. In such societies, slaves can be bought and sold 
on the market and conveyed by inheritance, and it is common to include 
slaves in calculating a slaveholder’s wealth. I will show how this worked when 
I examine the composition of private capital in the southern United States 
before 1865. Leaving such special (and for now historical) cases aside, it makes 
little sense to attempt to add human and nonhuman capital. Throughout 
history, both forms of wealth have played fundamental and complementary 
roles in economic growth and development and will continue to do so in the 
twenty-first century. But in order to understand the growth process and the 
inequalities it engenders, we must distinguish carefully between human and 
nonhuman capital and treat each one separately. 

Nonhuman capital, which in this book I will call simply “capital,” in¬ 
cludes all forms of wealth that individuals (or groups of individuals) can own 
and that can be transferred or traded through the market on a permanent 
basis. In practice, capital can be owned by private individuals (in which case 
we speak of “private capital”) or by the government or government agencies 


46 


INCOME AND OUTPUT 


(in which case we speak of “public capital”). There are also intermediate forms 
of collective property owned by “moral persons” (that is, entities such as foun¬ 
dations and churches) pursuing specific aims. I will come back to this. The 
boundary between what private individuals can and cannot own has evolved 
considerably over time and around the world, as the extreme case of slavery 
indicates. The same is true of property in the atmosphere, the sea, mountains, 
historical monuments, and knowledge. Certain private interests would like to 
own these things, and sometimes they justify this desire on grounds of effi¬ 
ciency rather than mere self-interest. But there is no guarantee that this de¬ 
sire coincides with the general interest. Capital is not an immutable concept: 
it reflects the state of development and prevailing social relations of each 
society. 


Capital and Wealth 

To simplify the text, I use the words “capital” and “wealth” interchangeably, 
as if they were perfectly synonymous. By some definitions, it would be better 
to reserve the word “capital” to describe forms of wealth accumulated by hu¬ 
man beings (buildings, machinery, infrastructure, etc.) and therefore to ex¬ 
clude land and natural resources, with which humans have been endowed 
without having to accumulate them. Land would then be a component of 
wealth but not of capital. The problem is that it is not always easy to distin¬ 
guish the value of buildings from the value of the land on which they are 
built. An even greater difficulty is that it is very hard to gauge the value of 
“virgin” land (as humans found it centuries or millennia ago) apart from im¬ 
provements due to human intervention, such as drainage, irrigation, fertiliza¬ 
tion, and so on. The same problem arises in connection with natural resources 
such as petroleum, gas, rare earth elements, and the like, whose pure value is 
hard to distinguish from the value added by the investments needed to dis¬ 
cover new deposits and prepare them for exploitation. I therefore include all 
these forms of wealth in capital. Of course, this choice does not eliminate the 
need to look closely at the origins of wealth, especially the boundary line be¬ 
tween accumulation and appropriation. 

Some definitions of “capital” hold that the term should apply only to those 
components of wealth directly employed in the production process. For in¬ 
stance, gold might be counted as part of wealth but not of capital, because 


47 


INCOME AND CAPITAL 


gold is said to be useful only as a store of value. Once again, this limitation 
strikes me as neither desirable nor practical (because gold can be a factor of 
production, not only in the manufacture of jewelry but also in electronics and 
nanotechnology). Capital in all its forms has always played a dual role, as both 
a store of value and a factor of production. I therefore decided that it was sim¬ 
pler not to impose a rigid distinction between wealth and capital. 

Similarly, I ruled out the idea of excluding residential real estate from 
capital on the grounds that it is “unproductive,” unlike the “productive capi¬ 
tal” used by firms and government: industrial plants, office buildings, ma¬ 
chinery, infrastructure, and so on. The truth is that all these forms of wealth 
are useful and productive and reflect capital’s two major economic functions. 
Residential real estate can be seen as a capital asset that yields “housing ser¬ 
vices,” whose value is measured by their rental equivalent. Other capital assets 
can serve as factors of production for firms and government agencies that 
produce goods and services (and need plants, offices, machinery, infrastruc¬ 
ture, etc. to do so). Each of these two types of capital currently accounts for 
roughly half the capital stock in the developed countries. 

To summarize, I define “national wealth” or “national capital” as the total 
market value of everything owned by the residents and government of a given 
country at a given point in time, provided that it can be traded on some mar¬ 
ket. 8 It consists of the sum total of nonfinancial assets (land, dwellings, com¬ 
mercial inventory, other buildings, machinery, infrastructure, patents, and 
other directly owned professional assets) and financial assets (bank accounts, 
mutual funds, bonds, stocks, financial investments of all kinds, insurance poli¬ 
cies, pension funds, etc.), less the total amount of financial liabilities (debt). 9 If 
we look only at the assets and liabilities of private individuals, the result is 
private wealth or private capital. If we consider assets and liabilities held by 
the government and other governmental entities (such as towns, social insur¬ 
ance agencies, etc.), the result is public wealth or public capital. By definition, 
national wealth is the sum of these two terms: 

National wealth = private wealth + public wealth 

Public wealth in most developed countries is currently insignificant (or 
even negative, where the public debt exceeds public assets). As I will show, 
private wealth accounts for nearly all of national wealth almost everywhere. 


48 


INCOME AND OUTPUT 


This has not always been the case, however, so it is important to distinguish 
clearly between the two notions. 

To be clear, although my concept of capital excludes human capital (which 
cannot be exchanged on any market in nonslave societies), it is not limited to 
“physical” capital (land, buildings, infrastructure, and other material goods). 
I include “immaterial” capital such as patents and other intellectual property, 
which are counted either as nonfinancial assets (if individuals hold patents 
directly) or as financial assets (when an individual owns shares of a corpora¬ 
tion that holds patents, as is more commonly the case). More broadly, many 
forms of immaterial capital are taken into account by way of the stock market 
capitalization of corporations. For instance, the stock market value of a com¬ 
pany often depends on its reputation and trademarks, its information systems 
and modes of organization, its investments, whether material or immaterial, 
for the purpose of making its products and services more visible and attrac¬ 
tive, and so on. All of this is reflected in the price of common stock and other 
corporate financial assets and therefore in national wealth. 

To be sure, the price that the financial markets sets on a company’s or even 
a sector’s immaterial capital at any given moment is largely arbitrary and un¬ 
certain. We see this in the collapse of the Internet bubble in 2000, in the fi¬ 
nancial crisis that began in 2007-2008, and more generally in the enormous 
volatility of the stock market. The important fact to note for now is that this 
is a characteristic of all forms of capital, not just immaterial capital. Whether 
we are speaking of a building or a company, a manufacturing firm or a service 
firm, it is always very difficult to set a price on capital. Yet as I will show, total 
national wealth, that is, the wealth of a country as a whole and not of any par¬ 
ticular type of asset, obeys certain laws and conforms to certain regular 
patterns. 

One further point: total national wealth can always be broken down into 
domestic capital and foreign capital: 

National wealth = national capital = domestic capital + net foreign capital 

Domestic capital is the value of the capital stock (buildings, firms, etc.) 
located within the borders of the country in question. Net foreign capital—or 
net foreign assets—measures the country’s position vis-a-vis the rest of the 
world: more specifically, it is the difference between assets owned by the 


49 


INCOME AND CAPITAL 


country’s citizens in the rest of the world and assets of the country owned by 
citizens of other countries. On the eve of World War I, Britain and France both 
enjoyed significant net positive asset positions vis-a-vis the rest of the world. 
One characteristic of the financial globalization that has taken place since the 
1980s is that many countries have more or less balanced net asset positions, 
but those positions are quite large in absolute terms. In other words, many 
countries have large capital stakes in other countries, but those other coun¬ 
tries also have stakes in the country in question, and the two positions are 
more or less equal, so that net foreign capital is close to zero. Globally, of 
course, all the net positions must add up to zero, so that total global wealth 
equals the “domestic” capital of the planet as a whole. 

The Capital/Income Ratio 

Now that income and capital have been defined, I can move on to the first 
basic law tying these two ideas together. I begin by defining the capital/in- 
come ratio. 

Income is a flow. It corresponds to the quantity of goods produced and 
distributed in a given period (which we generally take to be a year). 

Capital is a stock. It corresponds to the total wealth owned at a given 
point in time. This stock comes from the wealth appropriated or accumulated 
in all prior years combined. 

The most natural and useful way to measure the capital stock in a particu¬ 
lar country is to divide that stock by the annual flow of income. This gives us 
the capital/income ratio, which I denote by the Greek letter ( 3 . 

For example, if a country’s total capital stock is the equivalent of six years 
of national income, we write (3 = 6 (or (3 = 600%). 

In the developed countries today, the capital/income ratio generally varies 
between 5 and 6, and the capital stock consists almost entirely of private capi¬ 
tal. In France and Britain, Germany and Italy, the United States and Japan, 
national income was roughly 30,000-35,000 euros per capita in 2010, whereas 
total private wealth (net of debt) was typically on the order of 150,000- 
200,000 euros per capita, or five to six times annual national income. There 
are interesting variations both within Europe and around the world. For in¬ 
stance, (3 is greater than 6 in Japan and Italy and less than 5 in the United 
States and Germany. Public wealth is just barely positive in some countries 


50 


INCOME AND OUTPUT 


and slightly negative in others. And so on. I examine all this in detail in the 
next few chapters. At this point, it is enough to keep these orders of magni¬ 
tude in mind, in order to make the ideas as concrete as possible . 10 

The fact that national income in the wealthy countries of the world in 
2010 was on the order of 30,000 euros per capita per annum (or 2,500 euros 
per month) obviously does not mean that everyone earns that amount. Like 
all averages, this average income figure hides enormous disparities. In prac¬ 
tice, many people earn much less than 2,500 euros a month, while others earn 
dozens of times that much. Income disparities are partly the result of unequal 
pay for work and partly of much larger inequalities in income from capital, 
which are themselves a consequence of the extreme concentration of wealth. 
The average national income per capita is simply the amount that one could 
distribute to each individual if it were possible to equalize the income distri¬ 
bution without altering total output or national income. 11 

Similarly, private per capita wealth on the order of 180,000 euros, or six 
years of national income, does not mean that everyone owns that much capi¬ 
tal. Many people have much less, while some own millions or tens of millions 
of euros’ worth of capital assets. Much of the population has very little accu¬ 
mulated wealth—significantly less than one year’s income: a few thousand 
euros in a bank account, the equivalent of a few weeks’ or months’ worth of 
wages. Some people even have negative wealth: in other words, the goods they 
own are worth less than the debts they owe. By contrast, others have consider¬ 
able fortunes, ranging from ten to twenty times their annual income or even 
more. The capital/income ratio for the country as a whole tells us nothing 
about inequalities within the country. But (3 does measure the overall impor¬ 
tance of capital in a society, so analyzing this ratio is a necessary first step in 
the study of inequality. The main purpose of Part Two is to understand how 
and why the capital/income ratio varies from country to country, and how it 
has evolved over time. 

To appreciate the concrete form that wealth takes in today’s world, it is 
useful to note that the capital stock in the developed countries currently con¬ 
sists of two roughly equal shares: residential capital and professional capital 
used by firms and government. To sum up, each citizen of one of the wealthy 
countries earned an average of 30,000 euros per year in 2010, owned approxi¬ 
mately 180,000 euros of capital, 90,000 in the form of a dwelling and another 
90,000 in stocks, bonds, savings, or other investments . 12 There are interesting 


5 i 


INCOME AND CAPITAL 


variations across countries, which I will analyze in Chapter z. For now, the 
fact that capital can be divided into two roughly equal shares will be useful to 
keep in mind. 

The First Fundamental Law of Capitalism: a = r X (3 

I can now present the first fundamental law of capitalism, which links the 
capital stock to the flow of income from capital. The capital/income ratio (3 is 
related in a simple way to the share of income from capital in national income, 
denoted a. The formula is 

a = rx (3 

where r is the rate of return on capital. 

For example, if (3 = 6oo% and r— 5%, then a = r X (3 = 30%. 13 

In other words, if national wealth represents the equivalent of six years of 
national income, and if the rate of return on capital is 5 percent per year, then 
capital’s share in national income is 30 percent. 

The formula a = r X (3 is a pure accounting identity. It can be applied to all 
societies in all periods of history, by definition. Though tautological, it should 
nevertheless be regarded as the first fundamental law of capitalism, because it 
expresses a simple, transparent relationship among the three most important 
concepts for analyzing the capitalist system: the capital/income ratio, the 
share of capital in income, and the rate of return on capital. 

The rate of return on capital is a central concept in many economic theo¬ 
ries. In particular, Marxist analysis emphasizes the falling rate of profit—a 
historical prediction that turned out to be quite wrong, although it does con¬ 
tain an interesting intuition. The concept of the rate of return on capital also 
plays a central role in many other theories. In any case, the rate of return on 
capital measures the yield on capital over the course of a year regardless of its 
legal form (profits, rents, dividends, interest, royalties, capital gains, etc.), ex¬ 
pressed as a percentage of the value of capital invested. It is therefore a broader 
notion than the “rate of profit,” 14 and much broader than the “rate of inter¬ 
est,” 15 while incorporating both. 

Obviously, the rate of return can vary widely, depending on the type of 
investment. Some firms generate rates of return greater than 10 percent per 


52 


INCOME AND OUTPUT 


year; others make losses (negative rate of return). The average long-run rate of 
return on stocks is 7-8 percent in many countries. Investments in real estate 
and bonds frequently return 3-4 percent, while the real rate of interest on 
public debt is sometimes much lower. The formula a = r X (3 tells us nothing 
about these subtleties, but it does tell us how to relate these three quantities, 
which can be useful for framing discussion. 

For example, in the wealthy countries around 2.010, income from capital 
(profits, interests, dividends, rents, etc.) generally hovered around 30 percent 
of national income. With a capital/income ratio on the order of 600 percent, 
this meant that the rate of return on capital was around 5 percent. 

Concretely, this means that the current per capita national income of 
30,000 euros per year in rich countries breaks down as 21,000 euros per year 
income from labor (70 percent) and 9,000 euros income from capital (30 per¬ 
cent). Each citizen owns an average of 180,000 euros of capital, and the 9,000 
euros of income front capital thus corresponds to an average annual return on 
capital of 3 percent. 

Once again, I am speaking here only of averages: some individuals receive 
far more than 9,000 euros per year in income from capital, while others receive 
nothing while paying rent to their landlords and interest to their creditors. 
Considerable country-to-country variation also exists. In addition, measur¬ 
ing the share of income from capital is often difficult in both a conceptual and 
a practical sense, because there are some categories of income (such as nonwage 
self-employment income and entrepreneurial income) that are hard to break 
down into income from capital and income from labor. In some cases this can 
make comparison misleading. When such problems arise, the least imperfect 
method of measuring the capital share of income may be to apply a plausible 
average rate of return to the capital/income ratio. At this stage, the orders of 
magnitude given above ((3 = 6 00%, a = 30%, r = 5%) may be taken as typical. 

For the sake of concreteness, let us note, too, that the average rate of re¬ 
turn on land in rural societies is typically on the order of 4-5 percent. In the 
novels of Jane Austen and Honore de Balzac, the fact that land (like govern¬ 
ment bonds) yields roughly 3 percent of the amount of capital invested (or, 
equivalently, that the value of capital corresponds to roughly twenty years of 
annual rent) is so taken for granted that it often goes unmentioned. Contempo¬ 
rary readers were well aware that it took capital on the order of 1 million francs 
to produce an annual rent of 50,000 francs. For nineteenth-century novelists 


53 


INCOME AND CAPITAL 


and their readers, the relation between capital and annual rent was self-evident, 
and the two measuring scales were used interchangeably, as if rent and capital 
were synonymous, or perfect equivalents in two different languages. 

Now, at the beginning of the twenty-first century, we find roughly the 
same return on real estate, 4-5 percent, sometimes a little less, especially 
where prices have risen rapidly without dragging rents upward at the same 
rate. For example, in 2.010, a large apartment in Paris, valued at 1 million eu¬ 
ros, typically rents for slightly more than 2,500 euros per month, or annual 
rent of 30,000 euros, which corresponds to a return on capital of only 3 per¬ 
cent per year from the landlord’s point of view. Such a rent is nevertheless 
quite high for a tenant living solely on income from labor (one hopes he or she 
is paid well) while it represents a significant income for the landlord. The bad 
news (or good news, depending on your point of view) is that things have al¬ 
ways been like this. This type of rent tends to rise until the return on capital is 
around 4 percent (which in this example would correspond to a rent of 
3,000-3,500 euros per month, or 40,000 per year). Hence this tenant’s rent is 
likely to rise in the future. The landlord’s annual return on investment may 
eventually be enhanced by a long-term capital gain on the value of the apart¬ 
ment. Smaller apartments yield a similar or perhaps slightly higher return. An 
apartment valued at 100,000 euros may yield 400 euros a month in rent, or 
nearly 5,000 per year (5 percent). A person who owns such an apartment and 
chooses to live in it can save the rental equivalent and devote that money to 
other uses, which yields a similar return on investment. 

Capital invested in businesses is of course at greater risk, so the average 
return is often higher. The stock-market capitalization of listed companies 
in various countries generally represents 12 to 15 years of annual profits, 
which corresponds to an annual return on investment of 6-8 percent (be¬ 
fore taxes). 

The formula a = r X (3 allows us to analyze the importance of capital for an 
entire country or even for the planet as a whole. It can also be used to study 
the accounts of a specific company. For example, take a firm that uses capital 
valued at 5 million euros (including offices, infrastructure, machinery, etc.) to 
produce 1 million euros worth of goods annually, with 600,000 euros going 
to pay workers and 400,000 euros in profits. 16 The capital/income ratio of 
this company is (3 = 5 (its capital is equivalent to five years of output), the capi¬ 
tal share a is 40 percent, and the rate of return on capital is r— 8 percent. 


54 


INCOME AND OUTPUT 


Imagine another company that uses less capital (3 million euros) to pro¬ 
duce the same output (1 million euros), but using more labor (700,000 euros 
in wages, 300,000 in profits). For this company, (3 = 3, a = 30 percent, and 
r = 10 percent. The second firm is less capital intensive than the first, but it is 
more profitable (the rate of return on its capital is significantly higher). 

In all countries, the magnitudes of ( 3 , a, and rvary a great deal from company 
to company. Some sectors are more capital intensive than others: for example, 
the metal and energy sectors are more capital intensive than the textile and 
food processing sectors, and the manufacturing sector is more capital inten¬ 
sive than the service sector. There are also significant variations between firms 
in the same sector, depending on their choice of production technology and 
market position. The levels of ( 3 , a, and r in a given country also depend on the 
relative shares of residential real estate and natural resources in total capital. 

It bears emphasizing that the law a = rX (3 does not tell us how each of 
these three variables is determined, or, in particular, how the national capital/ 
income ratio (( 3 ) is determined, the latter being in some sense a measure of 
how intensely capitalistic the society in question is. To answer that question, 
we must introduce additional ideas and relationships, in particular the sav¬ 
ings and investment rates and the rate of growth. This will lead us to the sec¬ 
ond fundamental law of capitalism: the higher the savings rate and the lower 
the growth rate, the higher the capital/income ratio (( 3 ). This will be shown in 
the next few chapters; at this stage, the law a = r X (3 simply means that regard¬ 
less of what economic, social, and political forces determine the level of the 
capital/income ratio (( 3 ), capital’s share in income (a), and the rate of return 
on capital (r), these three variables are not independent of one another. Con¬ 
ceptually, there are two degrees of freedom, not three. 

National Accounts: An Evolving Social Construct 

Now that the key concepts of output and income, capital and wealth, capital/ 
income ratio, and rate of return on capital have been explained, I will examine 
in greater detail how these abstract quantities can be measured and what such 
measurements can tell us about the historical evolution of the distribution of 
wealth in various countries. I will briefly review the main stages in the history 
of national accounts and then present a portrait in broad brushstrokes of 
how the global distribution of output and income has changed since the 


55 


INCOME AND CAPITAL 


eighteenth century, along with a discussion of how demographic and eco¬ 
nomic growth rates have changed over the same period. These growth rates 
will play an important part in the analysis. 

As noted, the first attempts to measure national income and capital date 
back to the late seventeenth and early eighteenth century. Around 1700, sev¬ 
eral isolated estimates appeared in Britain and France (apparently indepen¬ 
dently of one another). I am speaking primarily of the work of William Petty 
(1664) and Gregory King (1696) for England and Pierre le Pesant, sieur de 
Boisguillebert (1695), and Sebastien Le Prestre de Yauban (1707) for France. 
Their work focused on both the national stock of capital and the annual flow 
of national income. One of their primary objectives was to calculate the total 
value of land, by far the most important source of wealth in the agrarian soci¬ 
eties of the day, and then to relate the quantity of landed wealth to the level of 
agricultural output and land rents. 

It is worth noting that these authors often had a political objective in 
mind, generally having to do with modernization of the tax system. By calcu¬ 
lating the nation’s income and wealth, they hoped to show the sovereign that 
it would be possible to raise tax receipts considerably while keeping tax rates 
relatively low, provided that all property and goods produced were subject to 
taxation and everyone was required to pay, including landlords of both aristo¬ 
cratic and common descent. This objective is obvious in Vauban’s Projet de 
dime royale (Plan for a Royal Tithe), but it is just as clear in the works of Bois¬ 
guillebert and King (though less so in Petty’s writing). 

The late eighteenth century saw further attempts to measure income and 
wealth, especially around the time of the French Revolution. Antoine Lavoisier 
published his estimates for the year 1789 in his hook La Richesse territoriale 
du Royaume de France (The Territorial Wealth of the Kingdom of France), 
published in 1791. The new tax system established after the Revolution, which 
ended the privileges of the nobility and imposed a tax on all property in land, 
was largely inspired by this work, which was widely used to estimate expected 
receipts from new taxes. 

It was above all in the nineteenth century, however, that estimates of na¬ 
tional wealth proliferated. From 1870 to 1900, Robert Giffen regularly up¬ 
dated his estimates of Britain’s stock of national capital, which he compared 
to estimates by other authors (especially Patrick Colquhoun) from the early 
1800s. Giffen marveled at the size of Britain’s stock of industrial capital as 


56 


INCOME AND OUTPUT 


well as the stock of foreign assets acquired since the Napoleonic wars, which 
was many times larger than the entire public debt due to those wars. 17 In France 
at about the same time, Alfred de Foville and Clement Colson published esti¬ 
mates of “national wealth” and “private wealth,” and, like Giffen, both writers 
also marveled at the considerable accumulation of private capital over the course 
of the nineteenth century. It was glaringly obvious to everyone that private 
fortunes were prospering in the period 1870-1914. For the economists of the 
day, the problem was to measure that wealth and compare different countries 
(the Franco-British rivalry was never far from their minds). Until World War I, 
estimates of wealth received much more attention than estimates of income 
and output, and there were in any case more of them, not only in Britain and 
France but also in Germany, the United States, and other industrial powers. 
In those days, being an economist meant first and foremost being able to esti¬ 
mate the national capital of one’s country: this was almost a rite of initiation. 

It was not until the period between the two world wars that national 
accounts began to be established on an annual basis. Previous estimates had 
always focused on isolated years, with successive estimates separated by ten or 
more years, as in the case of Giffen’s calculations of British national capital in 
the nineteenth century. In the 1930s, improvements in the primary statistical 
sources made the first annual series of national income data possible. These 
generally went back as far as the beginning of the twentieth century or the 
last decades of the nineteenth. They were established for the United States 
by Kuznets and Kendrick, for Britain by Bowley and Clark, and for France 
by Duge de Bernonville. After World War II, government statistical offices 
supplanted economists and began to compile and publish official annual data 
on GDP and national income. These official series continue to this day. 

Compared with the pre-World War I period, however, the focal point of 
the data had changed entirely. From the 1940s on, the primary motivation 
was to respond to the trauma of the Great Depression, during which govern¬ 
ments had no reliable annual estimates of economic output. There was there¬ 
fore a need for statistical and political tools in order to steer the economy 
properly and avoid a repeat of the catastrophe. Governments thus insisted on 
annual or even quarterly data on output and income. Estimates of national 
wealth, which had been so prized before 1914, now took a backseat, especially 
after the economic and political chaos of 1914-1945 made it difficult to inter¬ 
pret their meaning. Specifically, the prices of real estate and financial assets 


57 


INCOME AND CAPITAL 


fell to extremely low levels, so low that private capital seemed to have 
evaporated. In the 1950s and 1960s, a period of reconstruction, the main 
goal was to measure the remarkable growth of output in various branches 
of industry. 

In the 1990S-2000S, wealth accounting again came to the fore. Econo¬ 
mists and political leaders were well aware that the financial capitalism of the 
twenty-first century could not be properly analyzed with the tools of the 
1950s and 1960s. In collaboration with central banks, government statistical 
agencies in various developed countries compiled and published annual series 
of data on the assets and liabilities of different groups, in addition to the usual 
income and output data. These wealth accounts are still far from perfect: for 
example, natural capital and damages to the environment are not well ac¬ 
counted for. Nevertheless, they represent real progress in comparison with na¬ 
tional accounts from the early postwar years, which were concerned solely with 
endless growth in output. 18 These are the official series that I use in this book 
to analyze aggregate wealth and the current capital/income ratio in the wealthy 
countries. 

One conclusion stands out in this brief history of national accounting: 
national accounts are a social construct in perpetual evolution. They always 
reflect the preoccupations of the era when they were conceived. 19 We should 
be careful not to make a fetish of the published figures. When a country’s na¬ 
tional income per capita is said to be 30,000 euros, it is obvious that this num¬ 
ber, like all economic and social statistics, should be regarded as an estimate, a 
construct, and not a mathematical certainty. It is simply the best estimate we 
have. National accounts represent the only consistent, systematic attempt to 
analyze a country’s economic activity. They should be regarded as a limited 
and imperfect research tool, a compilation and arrangement of data from 
highly disparate sources. In all developed countries, national accounts are 
currently compiled by government statistical offices and central banks from 
the balance sheets and account books of financial and nonfinancial corpora¬ 
tions together with many other statistical sources and surveys. We have no 
reason to think a priori that the officials involved in these efforts do not do 
their best to spot inconsistencies in the data in order to achieve the best pos¬ 
sible estimates. Provided we use these data with caution and in a critical spirit 
and complement them with other data where there are errors or gaps (say, in 


58 


INCOME AND OUTPUT 


dealing with tax havens), these national accounts are an indispensable tool for 
estimating aggregate income and wealth. 

In particular, as I will show in Part Two, we can put together a consistent 
analysis of the historical evolution of the capital/income ratio by meticulously 
compiling and comparing national wealth estimates by many authors from 
the eighteenth to the early twentieth century and connecting them up with 
official capital accounts from the late twentieth and early twenty-first cen¬ 
tury. The other major limitation of official national accounts, apart from their 
lack of historical perspective, is that they are deliberately concerned only with 
aggregates and averages and not with distributions and inequalities. We must 
therefore draw on other sources to measure the distribution of income and 
wealth and to study inequalities. National accounts thus constitute a crucial 
element of our analyses, but only when completed with additional historical 
and distributional data. 

The Global Distribution of Production 

I begin by examining the evolution of the global distribution of production, 
which is relatively well known from the early nineteenth century on. For ear¬ 
lier periods, estimates are more approximate, but we know the broad outlines, 
thanks most notably to the historical work of Angus Maddison, especially 
since the overall pattern is relatively simple. 20 

From 1900 to 1980, 70-80 percent of the global production of goods 
and services was concentrated in Europe and America, which incontestably 
dominated the rest of the world. By 2010, the European-American share 
had declined to roughly 50 percent, or approximately the same level as in 
i860. In all probability, it will continue to fall and may go as low as 20-30 
percent at some point in the twenty-first century. This was the level main¬ 
tained up to the turn of the nineteenth century and would be consistent 
with the European-American share of the world’s population (see Figures 1.1 
and 1.2). 

In other words, the lead that Europe and America achieved during the 
Industrial Revolution allowed these two regions to claim a share of global 
output that was two to three times greater than their share of the world’s 
population simply because their output per capita was two to three times 


59 


INCOME AND CAPITAL 



figure 1.1. The distribution ofworld output, 1700-2012 

Europe’s GDP made 47 percent ofworld GDP in 1913, down to 25 percent in 2012. 
Sources and series: see piketty.pse.ens.fr/capital21c. 



FIGURE 1.2. The distribution of world population, 1700-2012 

Europe’s population made 26 percent ofworld population in 1913, down to 10 percent 
in 2012. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


60 



























Per capita GDP (% of world average) 


INCOME AND OUTPUT 



1700 i8zo 1870 1913 1950 1970 1990 2012 


figure 1.3. Global inequality, 1700-2011: divergence then convergence? 

Per capita GDP in Asia-Africa went from 37 percent of world average in 1950 to 61 
percent in 2012. 

Sources and series: see piketty.pse.ens.fr/capital21c. 

greater than the global average. 21 All signs are that this phase of divergence 
in per capita output is over and that we have embarked on a period of con¬ 
vergence. The resulting “catch-up” phenomenon is far from over, however 
(see Figure 1.3). It is far too early to predict when it might end, especially since 
the possibility of economic and/or political reversals in China and elsewhere 
obviously cannot be ruled out. 

From Continental Blocs to Regional Blocs 

The general pattern just described is well known, but a number of points need 
to be clarified and refined. First, putting Europe and the Americas together as 
a single “Western bloc” simplifies the presentation but is largely artificial. Eu¬ 
rope attained its maximal economic weight on the eve of World War I, when 
it accounted for nearly 50 percent of global output, and it has declined steadily 
since then, whereas America attained its peak in the 1950s, when it accounted 
for nearly 40 percent of global output. 

Furthermore, both Europe and the Americas can be broken down into 
two highly unequal subregions: a hyperdeveloped core and a less developed 


61 







































INCOME AND CAPITAL 


periphery. Broadly speaking, global inequality is best analyzed in terms of re¬ 
gional blocs rather than continental blocs. This can be seen clearly in Table 
1.1, which shows the distribution of global output in 2.012.. All these numbers 
are of no interest in themselves, but it is useful to familiarize oneself with the 
principal orders of magnitude. 

The population of the planet is close to 7 billion in 2012, and global out¬ 
put is slightly greater than 70 trillion euros, so that global output per capita is 
almost exactly 10,000 euros. If we subtract 10 percent for capital depreciation 
and divide by 12, we find that this yields an average per capita monthly in¬ 
come of 760 euros, which may be a clearer way of making the point. In other 
words, if global output and the income to which it gives rise were equally di¬ 
vided, each individual in the world would have an income of about 760 euros 
per month. 

The population of Europe is about 740 million, about 540 million of 
whom live in member countries of the European Union, whose per capita 
output exceeds 27,000 euros per year. The remaining 200 million people live 
in Russia and Ukraine, where the per capita output is about 15,000 euros per 
year, barely 50 percent above the global average. 22 The European Union itself 
is relatively heterogeneous: 410 million of its citizens live in what used to be 
called Western Europe, three-quarters of them in the five most populous 
countries of the Union, namely Germany, France, Great Britain, Italy, and 
Spain, with an average per capita GDP of 31,000 euros per year, while the re¬ 
maining 130 million live in what used to be Eastern Europe, with an average 
per capita output on the order of 16,000 euros per year, not very different 
from the Russia-Ukraine bloc. 23 

The Americas can also be divided into distinct regions that are even more 
unequal than the European center and periphery: the US-Canada bloc has 
350 million people with a per capita output of 40,000 euros, while Latin 
America has 600 million people with a per capita output of 10,000 euros, ex¬ 
actly equal to the world average. 

Sub-Saharan Africa, with a population of 900 million and an annual out¬ 
put of only 1.8 trillion euros (less than the French GDP of 2 trillion), is eco¬ 
nomically the poorest region of the world, with a per capita output of only 
2,000 euros per year. India is slightly higher, while North Africa does mark¬ 
edly better, and China even better than that: with a per capita output of 


62 


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capita GDP of €10,100 (equivalent to a monthly income of about €760 per month). All numbers were rounded to the closed dozen or hundred. 

Sources: See piketty.pse.ens.fr/capital21c. 





INCOME AND CAPITAL 


8,000 euros per year, China in 2012 is not far below the world average. Japan’s 
annual per capita output is equal to that of the wealthiest European countries 
(approximately 30,000 euros), but its population is such a small minority in 
the greater Asian population that it has little influence on the continental 
average, which is close to that of China. 24 

Global Inequality: From iso Euros per Month to 
3,000 Euros per Month 

To sum up, global inequality ranges from regions in which the per capita in¬ 
come is on the order of 150-250 euros per month (sub-Saharan Africa, India) 
to regions where it is as high as 2,500-3,000 euros per month (Western Eu¬ 
rope, North America, Japan), that is, ten to twenty times higher. The global 
average, which is roughly equal to the Chinese average, is around 600-800 
euros per month. 

These orders of magnitude are significant and worth remembering. Bear 
in mind, however, that the margin of error in these figures is considerable: it is 
always much more difficult to measure inequalities between countries (or be¬ 
tween different periods) than within them. 

For example, global inequality would be markedly higher if we used cur¬ 
rent exchange rates rather than purchasing power parities, as I have done thus 
far. To understand what these terms mean, first consider the euro/dollar ex¬ 
change rate. In 2012, a euro was worth about $1.30 on the foreign exchange 
market. A European with an income of 1,000 euros per month could go to his 
or her bank and exchange that amount for $1,300. If that person then took 
that money to the United States to spend, his or her purchasing power would 
be $1,300. But according to the official International Comparison Program 
(ICP), European prices are about 10 percent higher than American prices, so 
that if this same European spent the same money in Europe, his or her pur¬ 
chasing power would be closer to an American income of $1,200. Thus we say 
that $1.20 has “purchasing power parity” with 1 euro. I used this parity 
rather than the exchange rate to convert American GDP to euros in Table 
1.1, and I did the same for the other countries listed. In other words, we com¬ 
pare the GDP of different countries on the basis of the actual purchasing 
power of their citizens, who generally spend their income at home rather than 
abroad. 25 


64 


INCOME AND OUTPUT 



1990 1992 1994 1996 1998 2000 1002 2004 2006 2008 2010 2012 

figure 1.4. Exchange rate and purchasing power parity: euro/dollar 

In 2012, 1 euro was worth $1.30 according to current exchange rate, but $1.20 in pur¬ 
chasing power parity. 

Sources and series: see piketty.pse.ens.fr/capital21c. 

The other advantage of using purchasing power parities is that they are 
more stable than exchange rates. Indeed, exchange rates reflect not only the 
supply and demand for the goods and services of different countries but also 
sudden changes in the investment strategies of international investors and 
volatile estimates of the political and/or financial stability of this or that 
country, to say nothing of unpredictable changes in monetary policy. Ex¬ 
change rates are therefore extremely volatile, as a glance at the large fluctua¬ 
tions of the dollar over the past few decades will show. The dollar/euro rate 
went from $1.30 per euro in the 1990s to less than $0.90 in 2001 before rising 
to around $1.50 in 2008 and then falling back to $1.30 in 2012. During that 
time, the purchasing power parity of the euro rose gently from roughly $1 per 
euro in the early 1990s to roughly $1.20 in 2010 (see Figure 1.4). 26 

Despite the best efforts of the international organizations involved in the 
ICP, there is no escaping the fact that these purchasing power parity estimates 
are rather uncertain, with margins of error on the order of 10 percent if not 
higher, even between countries at comparable levels of development. For ex¬ 
ample, the most recent available survey shows that while some European 
prices (for energy, housing, hotels, and restaurants) are indeed higher than 


65 

























































INCOME AND CAPITAL 


comparable American prices, others are sharply lower (for health and educa¬ 
tion, for instance ). 27 In theory, the official estimates weight all prices accord¬ 
ing to the weight of various goods and services in a typical budget for each 
country, but such calculations clearly leave a good deal of room for error, par¬ 
ticularly since it is very hard to measure qualitative differences for many ser¬ 
vices. In any case, it is important to emphasize that each of these price indices 
measures a different aspect of social reality. The price of energy measures 
purchasing power for energy (which is greater in the United States), while the 
price of health care measures purchasing power in that area (which is greater 
in Europe). The reality of inequality between countries is multidimensional, 
and it is misleading to say that it can all be summed up with a single index 
leading to an unambiguous classification, especially between countries with 
fairly similar average incomes. 

In the poorer countries, the corrections introduced by purchasing power 
parity are even larger: in Africa and Asia, prices are roughly half what they are 
in the rich countries, so that GDP roughly doubles when purchasing power 
parity is used for comparisons rather than the market exchange rate. This is 
chiefly a result of the fact that the prices of goods and services that cannot be 
traded internationally are lower, because these are usually relatively labor in¬ 
tensive and involve relatively unskilled labor (a relatively abundant factor of 
production in less developed countries), as opposed to skilled labor and capi¬ 
tal (which are relatively scarce in less developed countries). 28 Broadly speak¬ 
ing, the poorer a country is, the greater the correction: in 2012., the correction 
coefficient was 1.6 in China and 2.5 in India. 29 At this moment, the euro is 
worth 8 Chinese yuan on the foreign exchange market but only 5 yuan in 
purchasing power parity. The gap is shrinking as China develops and revalues 
the yuan (see Figure 1.5). Some writers, including Angus Maddison, argue 
that the gap is not as small as it might appear and that official international 
statistics underestimate Chinese GDP. 30 

Because of the uncertainties surrounding exchange rates and purchasing 
power parities, the average per capita monthly incomes discussed earlier (150- 
250 euros for the poorest countries, 600-800 euros for middling countries, 
and 2,500-3,000 euros for the richest countries) should be treated as approxi¬ 
mations rather than mathematical certainties. For example, the share of the 
rich countries (European Union, United States, Canada, and Japan) in global 
income was 46 percent in 2012 if we use purchasing power parity but 57 per- 


66 


INCOME AND OUTPUT 



figure 1.5. Exchange rate and purchasing power parity: euro/yuan 

In 1012, 1 euro was worth 8 yuan according to current exchange rate, but 5 yuan in 
purchasing power parity. 

Sources and series: see piketty.pse.ens.fr/capital21c. 

cent if we use current exchange rates. 31 The “truth” probably lies somewhere 
between these two figures and is probably closer to the first. Still, the orders of 
magnitude remain the same, as does the fact that the share of income going to 
the wealthy countries has been declining steadily since the 1970s. Regardless 
of what measure is used, the world clearly seems to have entered a phase in 
which rich and poor countries are converging in income. 

The Global Distribution of Income Is More 
Unequal Than the Distribution of Output 

To simplify the exposition, the discussion thus far has assumed that the na¬ 
tional income of each continental or regional grouping coincided with its do¬ 
mestic product: the monthly incomes indicated in Table 1.1 were obtained 
simply by deducting 10 percent from GDP (to account for depreciation of 
capital) and dividing by twelve. 

In fact, it is valid to equate income and output only at the global level and 
not at the national or continental level. Generally speaking, the global income 


67 




















































INCOME AND CAPITAL 


distribution is more unequal than the output distribution, because the coun¬ 
tries with the highest per capita output are also more likely to own part of the 
capital of other countries and therefore to receive a positive flow of income 
from capital originating in countries with a lower level of per capita output. In 
other words, the rich countries are doubly wealthy: they both produce more at 
home and invest more abroad, so that their national income per head is greater 
than their output per head. The opposite is true for poor countries. 

More specifically, all of the major developed countries (the United States, 
Japan, Germany, France, and Britain) currently enjoy a level of national in¬ 
come that is slightly greater than their domestic product. As noted, however, 
net income from abroad is just slightly positive and does not radically alter the 
standard of living in these countries. It amounts to about i or 2 percent of 
GDP in the United States, France, and Britain and 2-3 percent of GDP in 
Japan and Germany. This is nevertheless a significant boost to national income, 
especially for Japan and Germany, whose trade surpluses have enabled them 
to accumulate over the past several decades substantial reserves of foreign 
capital, the return on which is today considerable. 

I turn now from the wealthiest countries taken individually to continen¬ 
tal blocs taken as a whole. What we find in Europe, America, and Asia is 
something close to equilibrium: the wealthier countries in each bloc (gener¬ 
ally in the north) receive a positive flow of income from capital, which is 
partly canceled by the flow out of other countries (generally in the south and 
east), so that at the continental level, total income is almost exactly equal to 
total output, generally within 0.5 percent. 32 

The only continent not in equilibrium is Africa, where a substantial share 
of capital is owned by foreigners. According to the balance of payments data 
compiled since 1970 by the United Nations and other international organiza¬ 
tions such as the World Bank and International Monetary Fund, the income 
of Africans is roughly 5 percent less than the continent’s output (and as high 
as 10 percent lower in some individual countries). 33 With capital’s share of 
income at about 30 percent, this means that nearly 20 percent of African 
capital is owned by foreigners: think of the London stockholders of the 
Marikana platinum mine discussed at the beginning of this chapter. 

It is important to realize what such a figure means in practice. Since some 
kinds of wealth (such as residential real estate and agricultural capital) are 
rarely owned by foreign investors, it follows that the foreign-owned share of 


68 


INCOME AND OUTPUT 


Africa’s manufacturing capital may exceed 40-50 percent and may be higher 
still in other sectors. Despite the fact that there are many imperfections in the 
balance of payments data, foreign ownership is clearly an important reality in 
Africa today. 

If we look back farther in time, we find even more marked international 
imbalances. On the eve of World War I, the national income of Great Britain, 
the world’s leading investor, was roughly 10 percent above its domestic prod¬ 
uct. The gap was more than 5 percent in France, the number two colonial 
power and global investor, and Germany was a close third, even though its 
colonial empire was insignificant, because its highly developed industrial sec¬ 
tor accumulated large claims on the rest of the world. British, French, and 
German investment went partly to other European countries and the United 
States and partly to Asia and Africa. Overall, the European powers in 1913 
owned an estimated one-third to one-half of the domestic capital of Asia and 
Africa and more than three-quarters of their industrial capital. 34 

What Forces Favor Convergence? 

In theory, the fact that the rich countries own part of the capital of poor 
countries can have virtuous effects by promoting convergence. If the rich 
countries are so flush with savings and capital that there is little reason to 
build new housing or add new machinery (in which case economists say that 
the “marginal productivity of capital,” that is, the additional output due to 
adding one new unit of capital “at the margin,” is very low), it can be collec¬ 
tively efficient to invest some part of domestic savings in poorer countries 
abroad. Thus the wealthy countries—or at any rate the residents of wealthy 
countries with capital to spare—will obtain a better return on their invest¬ 
ment by investing abroad, and the poor countries will increase their produc¬ 
tivity and thus close the gap between them and the rich countries. According 
to classical economic theory, this mechanism, based on the free flow of capital 
and equalization of the marginal productivity of capital at the global level, 
should lead to convergence of rich and poor countries and an eventual reduc¬ 
tion of inequalities through market forces and competition. 

This optimistic theory has two major defects, however. First, from a 
strictly logical point of view, the equalization mechanism does not guarantee 
global convergence of per capita income. At best it can give rise to convergence 


69 


INCOME AND CAPITAL 


of per capita output, provided we assume perfect capital mobility and, even 
more important, total equality of skill levels and human capital across 
countries—no small assumption. In any case, the possible convergence of 
output per head does not imply convergence of income per head. After the 
wealthy countries have invested in their poorer neighbors, they may continue 
to own them indefinitely, and indeed their share of ownership may grow to 
massive proportions, so that the per capita national income of the wealthy 
countries remains permanently greater than that of the poorer countries, 
which must continue to pay to foreigners a substantial share of what their citi¬ 
zens produce (as African countries have done for decades). In order to deter¬ 
mine how likely such a situation is to arise, we must compare the rate of re¬ 
turn on capital that the poor countries must pay to the rich to the growth 
rates of rich and poor economies. Before proceeding down this road, we 
must first gain a better understanding of the dynamics of the capital/income 
ratio within a given country. 

Furthermore, if we look at the historical record, it does not appear that 
capital mobility has been the primary factor promoting convergence of rich 
and poor nations. None of the Asian countries that have moved closer to the 
developed countries of the West in recent years has benefited from large for¬ 
eign investments, whether it be Japan, South Korea, or Taiwan and more re¬ 
cently China. In essence, all of these countries themselves financed the neces¬ 
sary investments in physical capital and, even more, in human capital, which 
the latest research holds to be the key to long-term growth . 35 Conversely, 
countries owned by other countries, whether in the colonial period or in Af¬ 
rica today, have been less successful, most notably because they have tended to 
specialize in areas without much prospect of future development and because 
they have been subject to chronic political instability. 

Part of the reason for that instability may be the following. When a coun¬ 
try is largely owned by foreigners, there is a recurrent and almost irrepressible 
social demand for expropriation. Other political actors respond that invest¬ 
ment and development are possible only if existing property rights are uncon¬ 
ditionally protected. The country is thus caught in an endless alternation be¬ 
tween revolutionary governments (whose success in improving actual living 
conditions for their citizens is often limited) and governments dedicated to 
the protection of existing property owners, thereby laying the groundwork 
for the next revolution or coup. Inequality of capital ownership is already dif- 


70 


INCOME AND OUTPUT 


ficult to accept and peacefully maintain within a single national community. 
Internationally, it is almost impossible to sustain without a colonial type of 
political domination. 

Make no mistake: participation in the global economy is not negative in 
itself. Autarky has never promoted prosperity. The Asian countries that have 
lately been catching up with the rest of the world have clearly benefited from 
openness to foreign influences. But they have benefited far more from open 
markets for goods and services and advantageous terms of trade than from 
free capital flows. China, for example, still imposes controls on capital: for¬ 
eigners cannot invest in the country freely, but that has not hindered capital 
accumulation, for which domestic savings largely suffice. Japan, South Korea, 
and Taiwan all financed investment out of savings. Many studies also show 
that gains from free trade come mainly from the diffusion of knowledge and 
from the productivity gains made necessary by open borders, not from static 
gains associated with specialization, which appear to be fairly modest . 36 

To sum up, historical experience suggests that the principal mechanism 
for convergence at the international as well as the domestic level is the diffu¬ 
sion of knowledge. In other words, the poor catch up with the rich to the ex¬ 
tent that they achieve the same level of technological know-how, skill, and 
education, not by becoming the property of the wealthy. The diffusion of 
knowledge is not like manna from heaven: it is often hastened by interna¬ 
tional openness and trade (autarky does not encourage technological trans¬ 
fer). Above all, knowledge diffusion depends on a country’s ability to mobi¬ 
lize financing as well as institutions that encourage large-scale investment in 
education and training of the population while guaranteeing a stable legal 
framework that various economic actors can reliably count on. It is therefore 
closely associated with the achievement of legitimate and efficient government. 
Concisely stated, these are the main lessons that history has to teach about 
global growth and international inequalities. 


7i 


{ TWO } 


Growth: Illusions and Realities 


A global convergence process in which emerging countries are catching up 
with developed countries seems well under way today, even though substan¬ 
tial inequalities between rich and poor countries remain. There is, moreover, 
no evidence that this catch-up process is primarily a result of investment by 
the rich countries in the poor. Indeed, the contrary is true: past experience 
shows that the promise of a good outcome is greater when poor countries 
are able to invest in themselves. Beyond the central issue of convergence, 
however, the point I now want to stress is that the twenty-first century may 
see a return to a low-growth regime. More precisely, what we will find is 
that growth has in fact always been relatively slow except in exceptional 
periods or when catch-up is occurring. Furthermore, all signs are that 
growth—or at any rate its demographic component—will be even slower in the 
future. 

To understand what is at issue here and its relation to the convergence 
process and the dynamics of inequality, it is important to decompose the 
growth of output into two terms: population growth and per capita output 
growth. In other words, growth always includes a purely demographic com¬ 
ponent and a purely economic component, and only the latter allows for an 
improvement in the standard of living. In public debate this decomposition is 
too often forgotten, as many people seem to assume that population growth 
has ceased entirely, which is not yet the case—far from it, actually, although 
all signs indicate that we are headed slowly in that direction. In 2013-2014, 
for example, global economic growth will probably exceed 3 percent, thanks 
to very rapid progress in the emerging countries. But global population is still 
growing at an annual rate close to 1 percent, so that global output per capita 
is actually growing at a rate barely above 2 percent (as is global income per 
capita). 


72 


growth: illusions and realities 


Groivth over the Very Long Run 

Before turning to present trends, I will go back in time and present the stages 
and orders of magnitude of global growth since the Industrial Revolution. 
Consider first Table 2.1, which indicates growth rates over a very long period 
of time. Several important facts stand out. First, the takeoff in growth that 
began in the eighteenth century involved relatively modest annual growth 
rates. Second, the demographic and economic components of growth were 
roughly similar in magnitude. According to the best available estimates, 
global output grew at an average annual rate of 1.6 percent between 1700 and 
2012, 0.8 percent of which reflects population growth, while another 0.8 per¬ 
cent came from growth in output per head. 

Such growth rates may seem low compared to what one often hears in cur¬ 
rent debates, where annual growth rates below 1 percent are frequently dis¬ 
missed as insignificant and it is commonly assumed that real growth doesn’t 
begin until one has achieved 3-4 percent a year or even more, as Europe did in 
the thirty years after World War II and as China is doing today. 

In fact, however, growth on the order of 1 percent a year in both popula¬ 
tion and per capita output, if continued over a very long period of time, as was 
the case after 1700, is extremely rapid, especially when compared with the 
virtually zero growth rate that we observe in the centuries prior to the Indus¬ 
trial Revolution. 


table 2.1. 

World growth since the Industrial Revolution (average annual growth rate) 


Years 

World output (%) 

World population (%) 

Per capita output (%) 

0-1700 

O.I 

O.I 

0.0 

1700-2012 

1.6 

0.8 

0.8 

1700-1820 

0.5 

0.4 

0.1 

1820-1913 

i-5 

0.6 

0.9 

1913-2012 

3.0 

i-4 

1.6 


Note : Between 1913 and 2012, the growth rate of world GDP was 3.0 percent per year on average. This growth 
rate can be broken down between 1.4 percent for world population and 1.6 percent for per capita GDP. 
Sources'. See piketty.pse.ens.fr/capital21c. 


73 





INCOME AND CAPITAL 


Indeed, according to Maddison’s calculations, both demographic and eco¬ 
nomic growth rates between year o and 1700 were below 0.1 percent (more 
precisely, 0.06 percent for population growth and 0.02 percent for per capita 
output). 1 

To be sure, the precision of such estimates is illusory. We actually possess 
very little information about the growth of the world’s population between o 
and 1700 and even less about output per head. Nevertheless, no matter how 
much uncertainty there is about the exact figures (which are not very impor¬ 
tant in any case), there is no doubt whatsoever that the pace of growth was 
quite slow from antiquity to the Industrial Revolution, certainly no more 
than 0.1-0.2 percent per year. The reason is quite simple: higher growth rates 
would imply, implausibly, that the world’s population at the beginning of the 
Common Era was minuscule, or else that the standard of living was very sub¬ 
stantially below commonly accepted levels of subsistence. For the same rea¬ 
son, growth in the centuries to come is likely to return to very low levels, at 
least insofar as the demographic component is concerned. 

The Law of Cumulative Growth 

In order to understand this argument better, it may be helpful to pause a mo¬ 
ment to consider what might be called “the law of cumulative growth,” which 
holds that a low annual growth rate over a very long period of time gives rise 
to considerable progress. 

Concretely, the population of the world grew at an average annual rate of 
barely 0.8 percent between 1700 and 2012. Over three centuries, however, this 
meant that the global population increased more than tenfold. A planet with 
about 600 million inhabitants in 1700 had more than 7 billion in 2012 (see 
Figure 2.1). If this pace were to continue for the next three centuries, the 
world’s population would exceed 70 billion in 2300. 

To give a clear picture of the explosive effects of the law of cumulative 
growth, I have indicated in Table 2.2 the correspondence between the annual 
growth rate (the figure usually reported) and the long-term growth multi¬ 
plier. For example, a growth rate of 1 percent per year will multiply the popu¬ 
lation by a factor of 1.35 after thirty years, 3 after one hundred years, 20 after 
three hundred years, and more than 20,000 after one thousand years. The 
simple conclusion that jumps out from this table is that growth rates greater 


74 


growth: illusions and realities 



figure 2.i. The growth of world population, 1700-2012 

World population rose from 600 million inhabitants in 1700 to 7 billion in 2012. 
Sources and series: see piketty.pse.ens.fr/capital21c. 

than 1—1.5 percent a year cannot be sustained indefinitely without generating 
vertiginous population increases. 

We see clearly how different choices of time frame lead to contradictory 
perceptions of the growth process. Over a period of one year, 1 percent growth 
seems very low, almost imperceptible. People living at the time might not no¬ 
tice any change at all. To them, such growth might seem like complete stagna¬ 
tion, in which each year is virtually identical to the previous one. Growth 
might therefore seem like a fairly abstract notion, a purely mathematical and 
statistical construct. But if we expand the time frame to that of a generation, 
that is, about thirty years, which is the most relevant time scale for evaluating 
change in the society we live in, the same growth rate results in an increase of 
about a third, which represents a transformation of quite substantial magni¬ 
tude. Although this is less impressive than growth of 2-2.5 percent per year, 
which leads to a doubling in every generation, it is still enough to alter society 
regularly and profoundly and in the very long run to transform it radically. 

The law of cumulative growth is essentially identical to the law of cumula¬ 
tive returns, which says that an annual rate of return of a few percent, com¬ 
pounded over several decades, automatically results in a very large increase of 


75 



























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every 1,000 years. 






growth: illusions and realities 


the initial capital, provided that the return is constantly reinvested, or at a 
minimum that only a small portion of it is consumed by the owner of the 
capital (small in comparison with the growth rate of the society in question). 

The central thesis of this book is precisely that an apparently small gap 
between the return on capital and the rate of growth can in the long run have 
powerful and destabilizing effects on the structure and dynamics of social in¬ 
equality. In a sense, everything follows from the laws of cumulative growth and 
cumulative returns, and that is why the reader will find it useful at this point 
to become familiar with these notions. 

The Stages of Demographic Groivth 

I return now to the examination of global population growth. 

If the rhythm of demographic growth observed between 1700 and 2012. (0.8 
percent per year on average) had started in antiquity and continued ever since, 
the world’s population would have been multiplied by nearly 100,000 between 
o and 1700. Given that the population in 1700 is estimated to have been ap¬ 
proximately 600 million, we would have to assume a ridiculously small global 
population at the time of Christ’s birth (fewer than ten thousand people). Even 
a growth rate of 0.2 percent, extended over 1700 years, would imply a global 
population of only 20 million in year o, whereas the best available information 
suggests that the figure was actually greater than 200 million, with 50 million 
living in the Roman Empire alone. Regardless of any flaws that may exist in the 
historical sources and global population estimates for these two dates, there is 
not a shadow of a doubt that the average demographic growth rate between o 
and 1700 was less than 0.2 percent and almost certainly less than 0.1 percent. 

Contrary to a widely held belief, this Malthusian regime of very low 
growth was not one of complete demographic stagnation. The rate of growth 
was admittedly quite slow, and the cumulative growth of several generations 
was often wiped out in a few years by epidemic and famine. 2 Still, world popu¬ 
lation seems to have increased by a quarter between o and 1000, then by a half 
between 1000 and 1500, and by half again between 1500 and 1700, during 
which the demographic growth rate was close to 0.2 percent. The acceleration 
of growth was most likely a very gradual process, which proceeded hand in 
hand with growth in medical knowledge and sanitary improvements, that is 
to say, extremely slowly. 


77 


INCOME AND CAPITAL 


Demographic growth accelerated considerably after 1700, with average 
growth rates on the order of 0.4 percent per year in the eighteenth century 
and 0.6 percent in the nineteenth. Europe (including its American offshoot) 
experienced its most rapid demographic growth between 1700 and 1913, only 
to see the process reverse in the twentieth century: the rate of growth of the 
European population fell by half, to 0.4 percent, in the period 1913-2012, 
compared with 0.8 percent between 1820 and 1913. Here we see the phenom¬ 
enon known as the demographic transition: the continual increase in life ex¬ 
pectancy is no longer enough to compensate for the falling birth rate, and the 
pace of population growth slowly reverts to a lower level. 

In Asia and Africa, however, the birth rate remained high far longer than 
in Europe, so that demographic growth in the twentieth century reached ver¬ 
tiginous heights: 1.5-2 percent per year, which translates into a fivefold or more 
increase in the population over the course of a century. Egypt had a population 
of slightly more than 10 million at the turn of the twentieth century but now 
numbers more than 80 million. Nigeria and Pakistan each had scarcely more 
than 20 million people, but today each has more than 160 million. 

It is interesting to note that the growth rates of 1.5-2 percent a year at¬ 
tained by Asia and Africa in the twentieth century are roughly the same as 
those observed in America in the nineteenth and twentieth centuries (see 
Table 2.3). The United States thus went from a population of less than 3 mil¬ 
lion in 1780 to too million in 1910 and more than 300 million in 2010, or 
more than a hundredfold increase in just over two centuries, as mentioned 
earlier. The crucial difference, obviously, is that the demographic growth of 
the New World was largely due to immigration from other continents, espe¬ 
cially Europe, whereas the 1.5-2 percent growth in Asia and Africa is due en¬ 
tirely to natural increase (the surplus of births over deaths). 

As a consequence of this demographic acceleration, global population 
growth reached the record level of 1.4 percent in the twentieth century, com¬ 
pared with 0.4-0 .6 percent in the eighteenth and nineteenth centuries (see 
Table 2.3). 

It is important to understand that we are just emerging from this period of 
open-ended demographic acceleration. Between 1970 and 1990, global popu¬ 
lation was still growing 1.8 percent annually, almost as high as the absolute 
historical record of 1.9 percent achieved in the period 1950-1970. For the 


78 


growth: illusions and realities 


TABLE 2.3. 

Demographic growth since the Industrial Revolution (average annual growth rate) 


Years 

World population (%) 

Europe (%) 

America (%) 

Africa (%) 

Asia (%) 

0-1700 

O.I 

O.I 

0.0 

O.I 

O.I 

1700-2012 

0.8 

0.6 

i -4 

0.9 

0.8 

1700-1820 

0.4 

0.5 

0.7 

0.2 

0.5 

1820-1913 

0.6 

0.8 

i -9 

0.6 

0.4 

1913-2012 

i -4 

0.4 

i -7 

2.2 

i -5 

Projections 

0.7 

—0.1 

0.6 

1.9 

o -5 

2012—2050 






Projections 

0.2 

—0.1 

0.0 

1.0 

—0.2 

2050-2100 







Note: Between 1913 and 1012, the growth rate of world population was 1.4% per year, including 0.4% for Europe, 1.7% 
for America, etc. 

Sources : See piketty.pse.ens.fr/capitalnc. Projections for 2012-2100 correspond to the UN central scenario. 


period 1990-2012, the average rate is still 1.3 percent, which is extremely 
high. 3 

According to official forecasts, progress toward the demographic transi¬ 
tion at the global level should now accelerate, leading to eventual stabilization 
of the planet’s population. According to a UN forecast, the demographic 
growth rate should fall to 0.4 percent by the 2030s and settle around 0.1 per¬ 
cent in the 2070s. If this forecast is correct, the world will return to the very 
low-growth regime of the years before 1700. The global demographic growth 
rate would then have followed a gigantic bell curve in the period 1700-2100, 
with a spectacular peak of close to 2 percent in the period 1950-1990 (see 
Figure 2.2). 

Note, moreover, that the demographic growth anticipated for the second 
half of the twenty-first century (0.2 percent in the period 2050-2100) is en¬ 
tirely due to the continent of Africa (with annual growth of 1 percent). On the 
three other continents, the population will probably either stagnate (0.0 percent 
in America) or decrease (—0.1 percent in Europe and —0.2 percent in Asia). 
Such a prolonged period of negative demographic growth in peacetime would 
be unprecedented (see Table 2.3). 


79 





INCOME AND CAPITAL 



figure 2.2. The growth rate of world population from Antiquity to 2100 

The growth rate of world population was above 1 percent per year from 1950 to 2012 

and should return toward o percent by the end of the twenty-first century. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


Negative Demographic Growth? 

These forecasts are obviously rather uncertain. They depend first on the evolu¬ 
tion of life expectancy (and thus in part on advances in medical science) and 
second on the decisions that future generations will make in regard to child¬ 
bearing. If life expectancy is taken as given, the fertility rate determines the 
demographic growth rate. The important point to bear in mind is that small 
variations in the number of children couples decide to have can have signifi¬ 
cant consequences for society writ large . 4 

What demographic history teaches us is that these childbearing decisions 
are largely unpredictable. They are influenced by cultural, economic, psycho¬ 
logical, and personal factors related to the life goals that individuals choose 
for themselves. These decisions may also depend on the material conditions 
that different countries decide to provide, or not provide, for the purpose of 
making family life compatible with professional life: schools, day care, gender 
equality, and so on. These issues will undoubtedly play a growing part in 
twenty-first-century political debate and public policy. Looking beyond the 
general schema just outlined, we find numerous regional differences and stun- 


80 





































growth: illusions and realities 


ning changes in demographic patterns, many of them linked to specific fea¬ 
tures of each country’s history. 5 

The most spectacular reversal no doubt involves Europe and America. In 
1780, when the population of Western Europe was already greater than too 
million and that of North America barely 3 million, no one could have 
guessed the magnitude of the change that lay ahead. By 2010, the population 
of Western Europe was just above 410 million, while the North American 
population had increased to 350 million. According to UN projections, the 
catch-up process will be complete by 2050, at which time the Western Euro¬ 
pean population will have grown to around 430 million, compared with 450 
million for North America. What explains this reversal? Not just the flow of 
immigrants to the New World but also the markedly higher fertility rate 
there compared with old Europe. The gap persists to this day, even among 
groups that came originally from Europe, and the reasons for it remain largely 
a mystery to demographers. One thing is sure: the higher fertility rate in 
North America is not due to more generous family policies, since such poli¬ 
cies are virtually nonexistent there. 

Should the difference be interpreted as reflecting a greater North Ameri¬ 
can faith in the future, a New World optimism, and a greater propensity to 
think of one’s own and one’s children’s futures in terms of a perpetually grow¬ 
ing economy? When it comes to decisions as complex as those related to fertil¬ 
ity, no psychological or cultural explanation can be ruled out in advance, and 
anything is possible. Indeed, US demographic growth has been declining 
steadily, and current trends could be reversed if immigration into the Euro¬ 
pean Union continues to increase, or fertility increases, or the European life 
expectancy widens the gap with the United States. United Nations forecasts 
are not certainties. 

We also find spectacular demographic turnarounds within each conti¬ 
nent. France was the most populous country in Europe in the eighteenth 
century (and, as noted, both Young and Malthus saw this as the reason for 
French rural poverty and even as the cause of the French Revolution). But the 
demographic transition occurred unusually early in France: a fall in the birth 
rate led to a virtually stagnant population as early as the nineteenth century. 
This is generally attributed to de-Christianization, which also came early. Yet 
an equally unusual leap in the birth rate took place in the twentieth century—a 
leap often attributed to prenatal policies adopted after the two world wars 


81 


INCOME AND CAPITAL 


and to the trauma of defeat in 1940. France’s wager may well pay off, since 
UN forecasts predict that the population of France will exceed that of Ger¬ 
many by 2050 or so. It is difficult, however, to distinguish the various causes 
of this reversal: economic, political, cultural, and psychological factors all play 
a part. 6 

On a grander scale, everyone knows the consequences of the Chinese 
policy to allow only one child per family (a decision made in the 1970s, when 
China feared being condemned to remain an underdeveloped country, and 
now in the process of being relaxed). The Chinese population, which was 
roughly 50 percent greater than India’s when this radical policy was adopted, 
is now close to being surpassed by that of its neighbor. According to the United 
Nations, India will be the most populous country in the world by 2.02.0. Yet 
here, too, nothing is set in stone: population history invariably combines indi¬ 
vidual choices, developmental strategies, and national psychologies—private 
motives and power motives. No one at this point can seriously claim to know 
what demographic turnarounds may occur in the twenty-first century. 

It would therefore be presumptuous to regard the official UN predictions 
as anything other than a “central scenario.” In any case, the United Nations 
has also published two other sets of predictions, and the gaps between these 
various scenarios at the 2100 horizon are, unsurprisingly, quite large. 7 

The central scenario is nevertheless the most plausible we have, given the 
present state of our knowledge. Between 1990 and 2012, the population of 
Europe was virtually stagnant, and the population of several countries actu¬ 
ally decreased. Fertility rates in Germany, Italy, Spain, and Poland fell below 
1.5 children per woman in the 2000s, and only an increase in life expectancy 
coupled with a high level of immigration prevented a rapid decrease of popu¬ 
lation. In view of these facts, the UN prediction of zero demographic growth 
in Europe until 2030 and slightly negative rates after that is by no means 
extravagant. Indeed, it seems to be the most reasonable forecast. The same is 
true for UN predictions for Asia and other regions: the generations being 
born now in Japan and China are roughly one-third smaller than the genera¬ 
tions born in the 1990s. The demographic transition is largely complete. 
Changes in individual decisions and government policies may slightly alter 
these trends: for example, slightly negative rates (such as we see in Japan and 
Germany) may become slightly positive (as in France and Scandinavia), which 


82 


growth: illusions and realities 


would be a significant change, but we are unlikely to see anything more than 
that, at least for the next several decades. 

Of course the very long-run forecasts are much more uncertain. Note, 
however, that if the rate of population growth observed from 1700 to 2012— 
0.8 percent per year—were to continue for the next three centuries, the world’s 
population would be on the order of 70 billion in 2300. To be sure, this can¬ 
not be ruled out: childbearing behavior could change, or technological ad¬ 
vances might allow growth with much less pollution than is possible to imag¬ 
ine now, with output consisting of new, almost entirely nonmaterial goods 
and services produced with renewable energy sources exhibiting a negligible 
carbon footprint. At this point, however, it is hardly an exaggeration to say 
that a world population of 70 billion seems neither especially plausible nor 
particularly desirable. The most likely hypothesis is that the global population 
growth rate over the next several centuries will be significantly less than 0.8 
percent. The official prediction of o. 1-0.2 percent per year over the very long 
run seems rather plausible a priori. 

Growth as a Factorfor Equalization 

In any case, it is not the purpose of this book to make demographic predic¬ 
tions but rather to acknowledge these various possibilities and analyze their 
implications for the evolution of the wealth distribution. Beyond the conse¬ 
quences for the development and relative power of nations, demographic 
growth also has important implications for the structure of inequality. Other 
things being equal, strong demographic growth tends to play an equalizing 
role because it decreases the importance of inherited wealth: every generation 
must in some sense construct itself. 

To take an extreme example, in a world in which each couple has ten chil¬ 
dren, it is clearly better as a general rule not to count too much on inherited 
wealth, because the family wealth will be divided by ten with each new gen¬ 
eration. In such a society, the overall influence of inherited wealth would be 
strongly diminished, and most people would be more realistic to rely on their 
own labor and savings. 

The same would be true in a society where the population is constantly 
replenished by immigration from other countries, as was the case in America. 


83 


INCOME AND CAPITAL 


Assuming that most immigrants arrive without much wealth, the amount 
of wealth passed down from previous generations is inherently fairly limited 
in comparison with new wealth accumulated through savings. Demographic 
growth via immigration has other consequences, however, especially in regard 
to inequality between immigrants and natives as well as within each group. 
Such a society is thus not globally comparable to a society in which the pri¬ 
mary source of population growth is natural increase (that is, from new 
births). 

I will show that the intuition concerning the effects of strong demo¬ 
graphic growth can to a certain extent be generalized to societies with very 
rapid economic (and not just demographic) growth. For example, in a society 
where output per capita grows tenfold every generation, it is better to count 
on what one can earn and save from one’s own labor: the income of previous 
generations is so small compared with current income that the wealth accu¬ 
mulated by one’s parents and grandparents doesn’t amount to much. 

Conversely, a stagnant or, worse, decreasing population increases the in¬ 
fluence of capital accumulated in previous generations. The same is true of 
economic stagnation. With low growth, moreover, it is fairly plausible that 
the rate of return on capital will be substantially higher than the growth rate, 
a situation that, as I noted in the introduction, is the main factor leading to¬ 
ward very substantial inequality in the distribution of wealth over the long 
run. Capital-dominated societies in the past, with hierarchies largely deter¬ 
mined by inherited wealth (a category that includes both traditional rural 
societies and the countries of nineteenth-century Europe) can arise and sub¬ 
sist only in low-growth regimes. I will consider the extent to which the prob¬ 
able return to a low-growth regime, if it occurs, will affect the dynamics of 
capital accumulation and the structure of inequality. In particular, inherited 
wealth will make a comeback—a long-term phenomenon whose effects are 
already being felt in Europe and that could extend to other parts of the world 
as well. That is why it is important for present purposes to become familiar 
with the history of demographic and economic growth. 

There is another mechanism whereby growth can contribute to the reduc¬ 
tion of inequality, or at least to a more rapid circulation of elites, which must 
also be discussed. This mechanism is potentially complementary to the first, 
although it is less important and more ambiguous. When growth is zero or 
very low, the various economic and social functions as well as types of profes- 


84 


growth: illusions and realities 


sional activity, are reproduced virtually without change from generation to 
generation. By contrast, constant growth, even if it is only 0.5 or 1 or 1.5 per¬ 
cent per year, means that new functions are constantly being created and new 
skills are needed in every generation. Insofar as tastes and capabilities are only 
partially transmitted from generation to generation (or are transmitted much 
less automatically and mechanically than capital in land, real estate, or finan¬ 
cial assets are transmitted by inheritance), growth can thus increase social 
mobility for individuals whose parents did not belong to the elite of the 
previous generation. This increased social mobility need not imply decreased 
income inequality, but in theory it does limit the reproduction and amplifica¬ 
tion of inequalities of wealth and therefore over the long run also limits 
income inequality to a certain extent. 

One should be wary, however, of the conventional wisdom that modern 
economic growth is a marvelous instrument for revealing individual talents 
and aptitudes. There is some truth in this view, but since the early nineteenth 
century it has all too often been used to justify inequalities of all sorts, no 
matter how great their magnitude and no matter what their real causes may 
be, while at the same time gracing the winners in the new industrial economy 
with every imaginable virtue. For instance, the liberal economist Charles 
Dunoyer, who served as a prefect under the July Monarchy, had this to say in 
his 1845 hook De la liberte du travail (in which he of course expressed his op¬ 
position to any form of labor law or social legislation): “one consequence of 
the industrial regime is to destroy artificial inequalities, but this only high¬ 
lights natural inequalities all the more clearly.” For Dunoyer, natural inequal¬ 
ities included differences in physical, intellectual, and moral capabilities, dif¬ 
ferences that were crucial to the new economy of growth and innovation that 
he saw wherever he looked. This was his reason for rejecting state intervention 
of any kind: “superior abilities... are the source of everything that is great and 
useful.... Reduce everything to equality and you will bring everything to a 
standstill .” 8 One sometimes hears the same thought expressed today in the idea 
that the new information economy will allow the most talented individuals to 
increase their productivity many times over. The plain fact is that this argument 
is often used to justify extreme inequalities and to defend the privileges of the 
winners without much consideration for the losers, much less for the facts, and 
without any real effort to verify whether this very convenient principle can ac¬ 
tually explain the changes we observe. I will come back to this point. 


85 


INCOME AND CAPITAL 


The Stages of Economic Groivth 

I turn now to the growth of per capita output. As noted, this was of the same 
order as population growth over the period 1700-2012: 0.8 percent per year 
on average, which equates to a multiplication of output by a factor of roughly 
ten over three centuries. Average global per capita income is currently around 
760 euros per month; in 1700, it was less than 70 euros per month, roughly 
equal to income in the poorest countries of Sub-Saharan Africa in 2012. 9 

This comparison is suggestive, but its significance should not be exagger¬ 
ated. When comparing very different societies and periods, we must avoid try¬ 
ing to sum everything up with a single figure, for example “the standard of liv¬ 
ing in society A is ten times higher than in society B.” When growth attains 
levels such as these, the notion of per capita output is far more abstract than that 
of population, which at least corresponds to a tangible reality (it is much easier 
to count people than to count goods and services). Economic development be¬ 
gins with the diversification of ways of life and types of goods and services 
produced and consumed. It is thus a multidimensional process whose very na¬ 
ture makes it impossible to sum up properly with a single monetary index. 

Take the wealthy countries as an example. In Western Europe, North 
America, and Japan, average per capita income increased from barely 100 eu¬ 
ros per month in 1700 to more than 2,500 euros per month in 2012, a more 
than twentyfold increase. 10 The increase in productivity, or output per hour 
worked, was even greater, because each person’s average working time de¬ 
creased dramatically: as the developed countries grew wealthier, they decided 
to work less in order to allow for more free time (the work day grew shorter, 
vacations grew longer, and so on). 11 

Much of this spectacular growth occurred in the twentieth century. Glob¬ 
ally, the average growth of per capita output of 0.8 percent over the period 
1700-2012 breaks down as follows: growth of barely 0.1 percent in the eigh¬ 
teenth century, 0.9 percent in the nineteenth century, and 1.6 percent in the 
twentieth century (see Table 2.1). In Western Europe, average growth of 1.0 
percent in the same period breaks down as 0.2 percent in the eighteenth cen¬ 
tury, 1.1 percent in the nineteenth century, and 1.9 percent in the twentieth 
century. 12 Average purchasing power in Europe barely increased at all from 
1700 to 1820, then more than doubled between 1820 and 1913, and increased 
more than sixfold between 1913 and 2012. Basically, the eighteenth century suf- 


86 


growth: illusions and realities 


fered from the same economic stagnation as previous centuries. The nineteenth 
century witnessed the first sustained growth in per capita output, although 
large segments of the population derived little benefit from this, at least until 
the last three decades of the century. It was not until the twentieth century that 
economic growth became a tangible, unmistakable reality for everyone. Around 
the turn of the twentieth century, average per capita income in Europe stood at 
just under 400 euros per month, compared with 2,500 euros in 2010. 

But what does it mean for purchasing power to be multiplied by a factor of 
twenty, ten, or even six? It clearly does not mean that Europeans in 2012 pro¬ 
duced and consumed six times more goods and services than they produced 
and consumed in 1913. For example, average food consumption obviously did 
not increase sixfold. Basic dietary needs would long since have been satisfied if 
consumption had increased that much. Not only in Europe but everywhere, 
improvements in purchasing power and standard of living over the long run de¬ 
pend primarily on a transformation of the structure of consumption: a consumer 
basket initially filled mainly with foodstuffs gradually gave way to a much more 
diversified basket of goods, rich in manufactured products and services. 

Furthermore, even if Europeans in 2012 wished to consume six times the 
amount of goods and services they consumed in 1913, they could not: some 
prices have risen more rapidly than the “average” price, while others have risen 
more slowly, so that purchasing power has not increased sixfold for all types 
of goods and services. In the short run, the problem of “relative prices” can be 
neglected, and it is reasonable to assume that the indices of “average” prices 
published by government agencies allow us to correctly gauge changes in pur¬ 
chasing power. In the long run, however, relative prices shift dramatically, as 
does the composition of the typical consumer’s basket of goods, owing largely to 
the advent of new goods and services, so that average price indices fail to give an 
accurate picture of the changes that have taken place, no matter how sophisti¬ 
cated the techniques used by the statisticians to process the many thousands of 
prices they monitor and to correct for improvements in product quality. 

What Does a Tenfold Increase in Purchasing Power Mean? 

In fact, the only way to accurately gauge the spectacular increase in standards 
of living since the Industrial Revolution is to look at income levels in today’s 
currency and compare these to price levels for the various goods and services 


87 


INCOME AND CAPITAL 


available in different periods. For now, I will simply summarize the main les¬ 
sons derived from such an exercise. 13 

It is standard to distinguish the following three types of goods and ser¬ 
vices. For industrial goods, productivity growth has been more rapid than 
for the economy as a whole, so that prices in this sector have fallen relative 
to the average of all prices. Foodstuffs is a sector in which productivity has 
increased continuously and crucially over the very long run (thereby allow¬ 
ing a greatly increased population to be fed by ever fewer hands, liberating a 
growing portion of the workforce for other tasks), even though the increase 
in productivity has been less rapid in the agricultural sector than in the in¬ 
dustrial sector, so that food prices have evolved at roughly the same rate as 
the average of all prices. Finally, productivity growth in the service sector 
has generally been low (or even zero in some cases, which explains why this 
sector has tended to employ a steadily increasing share of the workforce), so 
that the price of services has increased more rapidly than the average of all 
prices. 

This general pattern is well known. Although it is broadly speaking cor¬ 
rect, it needs to be refined and made more precise. In fact, there is a great deal 
of diversity within each of these three sectors. The prices of many food items 
did in fact evolve at the same rate as the average of all prices. For example, in 
France, the price of a kilogram of carrots evolved at the same rate as the over¬ 
all price index in the period 1900-2010, so that purchasing power expressed 
in terms of carrots evolved in the same way as average purchasing power (which 
increased approximately sixfold). An average worker could afford slightly less 
than ten kilos of carrots per day at the turn of the twentieth century, while he 
could afford nearly sixty kilos per day at the turn of the twenty-first century. 14 
For other foodstuffs, however, such as milk, butter, eggs, and dairy products 
in general, major technological advances in processing, manufacturing, con¬ 
servation, and so on led to relative price decreases and thus to increases in 
purchasing power greater than sixfold. The same is true for products that 
benefited from the significant reduction in transport costs over the course of 
the twentieth century: for example, French purchasing power expressed in 
terms of oranges increased tenfold, and expressed in terms of bananas, twen¬ 
tyfold. Conversely, purchasing power measured in kilos of bread or meat rose 
less than fourfold, although there was a sharp increase in the quality and vari¬ 
ety of products on offer. 


88 


growth: illusions and realities 


Manufactured goods present an even more mixed picture, primarily be¬ 
cause of the introduction of radically new goods and spectacular improve¬ 
ments in performance. The example often cited in recent years is that of elec¬ 
tronics and computer technology. Advances in computers and cell phones in 
the 19 9 os and of tablets and smartphones in the 2000s and beyond have led to 
tenfold increases in purchasing power in a very short period of time: prices 
have fallen by half, while performance has increased by a factor of 5. 

It is important to note that equally impressive examples can be found 
throughout the long history of industrial development. Take the bicycle. In 
France in the 1880s, the cheapest model listed in catalogs and sales brochures 
cost the equivalent of six months of the average worker’s wage. And this was a 
relatively rudimentary bicycle, “which had wheels covered with just a strip of 
solid rubber and only one brake that pressed directly against the front rim.” 
Technological progress made it possible to reduce the price to one month’s wages 
by 1910. Progress continued, and by the 1960s one could buy a quality bicycle 
(with “detachable wheel, two brakes, chain and mud guards, saddle bags, lights, 
and reflector”) for less than a week’s average wage. All in all, and leaving aside 
the prodigious improvement in the quality and safety of the product, purchas¬ 
ing power in terms of bicycles rose by a factor of 40 between 1890 and 1970. 15 

One could easily multiply examples by comparing the price history of 
electric light bulbs, household appliances, table settings, clothing, and auto¬ 
mobiles to prevailing wages in both developed and emerging economies. 

All of these examples show how futile and reductive it is to try to sum up 
all these change with a single index, as in “the standard of living increased 
tenfold between date A and date B.” When family budgets and lifestyles change 
so radically and purchasing power varies so much from one good to another, 
it makes little sense to take averages, because the result depends heavily on the 
weights and measures of quality one chooses, and these are fairly uncertain, 
especially when one is attempting comparisons across several centuries. 

None of this in any way challenges the reality of growth. Quite the con¬ 
trary: the material conditions of life have clearly improved dramatically since 
the Industrial Revolution, allowing people around the world to eat better, 
dress better, travel, learn, obtain medical care, and so on. It remains interest¬ 
ing to measure growth rates over shorter periods such as a generation or two. 
Over a period of thirty to sixty years, there are significant differences between 
a growth rate of 0.1 percent per year (3 percent per generation), 1 percent per 


89 


INCOME AND CAPITAL 


year (35 percent per generation), or 3 percent per year (143 percent per genera¬ 
tion). It is only when growth statistics are compiled over very long periods 
leading to multiplications by huge factors that the numbers lose a part of their 
significance and become relatively abstract and arbitrary quantities. 

Growth: A Diversification of Lifestyles 

To conclude this discussion, consider the case of services, where diversity is 
probably the most extreme. In theory, things are fairly clear: productivity 
growth in the service sector has been less rapid, so that purchasing power ex¬ 
pressed in terms of services has increased much less. As a typical case—a 
“pure” service benefiting from no major technological innovation over the 
centuries—one often takes the example of barbers: a haircut takes just as long 
now as it did a century ago, so that the price of a haircut has increased by 
the same factor as the barber’s pay, which has itself progressed at the same rate 
as the average wage and average income (to a first approximation). In other 
words, an hour’s work of the typical wage-earner in the twenty-first century 
can buy just as many haircuts as an hour’s work a hundred years ago, so that 
purchasing power expressed in terms of haircuts has not increased (and may 
in fact have decreased slightly). 16 

In fact, the diversity of services is so extreme that the very notion of a ser¬ 
vice sector makes little sense. The decomposition of the economy into three 
sectors—primary, secondary, and tertiary—was an idea of the mid-twentieth 
century in societies where each sector included similar, or at any rate compa¬ 
rable, fractions of economic activity and the workforce (see Table 2.4). But 
once 70-80 percent of the workforce in the developed countries found itself 
working in the service sector, the category ceased to have the same meaning: 
it provided little information about the nature of the trades and services pro¬ 
duced in a given society. 

In order to find our way through this vast aggregate of activities, whose 
growth accounts for much of the improvement in living conditions since the 
nineteenth century, it will be useful to distinguish several subsectors. Con¬ 
sider first services in health and education, which by themselves account for 
more than 20 percent of total employment in the most advanced countries (or 
as much as all industrial sectors combined). There is every reason to think 
that this fraction will continue to increase, given the pace of medical progress 


90 


growth: illusions and realities 


TABLE 2.4. 

Employment by sector in France and the United States, 1800-2012 
(% of total employment) 




France 



United States 


Year 

Agriculture 

Manufacturing 

Services 

Agriculture 

Manufacturing 

Services 

1800 

64 

22 

14 

68 

18 

13 

1900 

43 

19 

28 

4i 

28 

3i 

1950 

31 

33 

35 

15 

34 

50 

2012 

3 

21 

76 

2 

18 

80 


Note: In 2012, agriculture made up 3% of total employment in France v. 21% in manufacturing and 76% in services. 
Construction—7% of employment in France and the United States in 2012—was included in manufacturing. 
Sources'. See piketty.pse.ens.fr/capital21c. 


and the steady growth of higher education. The number of jobs in retail; ho¬ 
tels, cafes, and restaurants; and culture and leisure activities also increased 
rapidly, typically accounting for 20 percent of total employment. Services to 
firms (consulting, accounting, design, data processing, etc.) combined with 
real estate and financial services (real estate agencies, banks, insurance, etc.) 
and transportation add another 20 percent of the job total. If you then add 
government and security services (general administration, courts, police, 
armed forces, etc.), which account for nearly 10 percent of total employment in 
most countries, you reach the 70-80 percent figure given in official statistics. 17 

Note that an important part of these services, especially in health and ed¬ 
ucation, is generally financed by taxes and provided free of charge. The details 
of financing vary from country to country, as does the exact share financed by 
taxes, which is higher in Europe, for example, than in the United States or 
Japan. Still, it is quite high in all developed countries: broadly speaking, at 
least half of the total cost of health and education services is paid for by taxes, 
and in a number of European countries it is more than three-quarters. This 
raises potential new difficulties and uncertainties when it comes to measur¬ 
ing and comparing increases in the standard of living in different countries 
over the long run. This is not a minor point: not only do these two sectors 
account for more than 20 percent of GDP and employment in the most 
advanced countries—a percentage that will no doubt increase in the 
future—but health and education probably account for the most tangible 


9i 







INCOME AND CAPITAL 


and impressive improvement in standards of living over the past two centu¬ 
ries. Instead of living in societies where the life expectancy was barely forty 
years and nearly everyone was illiterate, we now live in societies where it is 
common to reach the age of eighty and everyone has at least minimal access to 
culture. 

In national accounts, the value of public services available to the public for 
free is always estimated on the basis of the production costs assumed by the 
government, that is, ultimately, by taxpayers. These costs include the wages 
paid to health workers and teachers employed by hospitals, schools, and pub¬ 
lic universities. This method of valuing services has its flaws, but it is logically 
consistent and clearly more satisfactory than simply excluding free public ser¬ 
vices from GDP calculations and concentrating solely on commodity produc¬ 
tion. It would be economically absurd to leave public services out entirely, 
because doing so would lead in a totally artificial way to an underestimate of 
the GDP and national income of a country that chose a public system of health 
and education rather than a private system, even if the available services were 
strictly identical. 

The method used to compute national accounts has the virtue of correct¬ 
ing this bias. Still, it is not perfect. In particular, there is no objective measure 
of the quality of services rendered (although various correctives for this are 
under consideration). For example, if a private health insurance system costs 
more than a public system but does not yield truly superior quality (as a com¬ 
parison of the United States with Europe suggests), then GDP will be artifi¬ 
cially overvalued in countries that rely mainly on private insurance. Note, 
too, that the convention in national accounting is not to count any remunera¬ 
tion for public capital such as hospital buildings and equipment or schools 
and universities . 18 The consequence of this is that a country that privatized its 
health and education services would see its GDP rise artificially, even if the 
services produced and the wages paid to employees remained exactly the 
same . 19 It may be that this method of accounting by costs underestimates the 
fundamental “value” of education and health and therefore the growth achieved 
during periods of rapid expansion of services in these areas . 20 

Hence there is no doubt that economic growth led to a significant im¬ 
provement in standard of living over the long run. The best available esti¬ 
mates suggest that global per capita income increased by a factor of more than 
to between 1700 and 2011 (from 70 euros to 760 euros per month) and by a 


92 


growth: illusions and realities 


factor of more than 20 in the wealthiest countries (from ioo to 2,500 euros 
per month). Given the difficulties of measuring such radical transformations, 
especially if we try to sum them up with a single index, we must be careful not 
to make a fetish of the numbers, which should rather be taken as indications 
of orders of magnitude and nothing more. 

The End of Growth? 

Now to consider the future. Will the spectacular increase in per capita output 
I have just described inexorably slow in the twenty-first century? Are we headed 
toward the end of growth for technological or ecological reasons, or perhaps 
both at once? 

Before trying to answer this question, it is important to recall that past 
growth, as spectacular as it was, almost always occurred at relatively slow an¬ 
nual rates, generally no more than 1-1.5 percent per year. The only historical 
examples of noticeably more rapid growth—3-4 percent or more—occurred 
in countries that were experiencing accelerated catch-up with other countries. 
This is a process that by definition ends when catch-up is achieved and there¬ 
fore can only be transitional and time limited. Clearly, moreover, such a 
catch-up process cannot take place globally. 

At the global level, the average rate of growth of per capita output was 0.8 
percent per year from 1700 to 2012, or 0.1 percent in the period 1700-1820, 
0.9 percent in 1820-1913, and 1.6 percent in 1913-2012. As indicated in Table 2.1, 
we find the same average growth rate—0.8 percent—when we look at world 
population 1700-2012. 

Table 2.5 shows the economic growth rates for each century and each con¬ 
tinent separately. In Europe, per capita output grew at a rate of 1.0 percent 
1820-1913 and 1.9 percent 1913-2012. In America, growth reached 1.5 percent 
1820-1913 and 1.5 percent again 1913-2012. 

The details are unimportant. The key point is that there is no historical 
example of a country at the world technological frontier whose growth in per 
capita output exceeded 1.5 percent over a lengthy period of time. If we look at 
the last few decades, we find even lower growth rates in the wealthiest coun¬ 
tries: between 1990 and 2012, per capita output grew at a rate of 1.6 percent in 
Western Europe, 1.4 percent in North America, and 0.7 percent in Japan. 21 It 
is important to bear this reality in mind as I proceed, because many people 


93 


INCOME AND CAPITAL 


TABLE Z.5. 

Per capita output growth since the Industrial Revolution 
(average annual growth ratej 


Years 

Per capita 
world 
output (%) 

Europe (%) 

America (%) 

Africa (%) 

Asia (%) 

0-1700 

0.0 

0.0 

0.0 

0.0 

0.0 

1700-2012 

0.8 

1.0 

1.1 

0.5 

0.7 

1700-1820 

0.1 

0.1 

0.4 

0.0 

0.0 

1820-1913 

0.9 

1.0 

i -5 

0.4 

0.2 

1913-2012 

1.6 

1-9 

i -5 

1.1 

2.0 

1913-1950 

0.9 

0.9 

i -4 

0.9 

0.2 

1950-1970 

2.8 

bo 

i -9 

2.1 

3-5 

1970-1990 

i -3 

i -9 

1.6 

0.3 

2.1 

1990-2012 

2.1 

1-9 

i -5 

i -4 

3.8 

1950-1980 

2-5 

3-4 

2.0 

1.8 

3 - 2 - 

1980-2012 

17 

1.8 

i -3 

0.8 

3 -i 


Note: Between 1910 and 2012, the growth rate of per capita output was 1.7% per year on average at the 
world level, including 1.9% in Europe, 1.6% in America, etc. 

Sources : See piketty.pse.ens.fr/capital21c. 


think that growth ought to be at least 3 or 4 percent per year. As noted, both 
history and logic show this to be illusory. 

With these preliminaries out of the way, what can we say about future 
growth rates? Some economists, such as Robert Gordon, believe that the rate 
of growth of per capita output is destined to slow in the most advanced coun¬ 
tries, starting with the United States, and may sink below 0.5 percent per year 
between 2050 and zioo. 22 Gordon’s analysis is based on a comparison of the 
various waves of innovation that have succeeded one another since the in¬ 
vention of the steam engine and introduction of electricity, and on the find¬ 
ing that the most recent waves—including the revolution in information 
technology—have a much lower growth potential than earlier waves, because 
they are less disruptive to modes of production and do less to improve produc¬ 
tivity across the economy. 


94 





growth: illusions and realities 


Just as I refrained earlier from predicting demographic growth, I will not 
attempt now to predict economic growth in the twenty-first century. Rather, 
I will attempt to draw the consequences of various possible scenarios for the 
dynamics of the wealth distribution. To my mind, it is as difficult to predict 
the pace of future innovations as to predict future fertility. The history of the 
past two centuries makes it highly unlikely that per capita output in the ad¬ 
vanced countries will grow at a rate above 1.5 percent per year, but I am unable 
to predict whether the actual rate will be 0.5 percent, 1 percent, or 1.5 percent. 
The median scenario I will present here is based on a long-term per capita 
output growth rate of 1.2 percent in the wealthy countries, which is relatively 
optimistic compared with Robert Gordon’s predictions (which I think are a 
little too dark). This level of growth cannot be achieved, however, unless new 
sources of energy are developed to replace hydrocarbons, which are rapidly 
being depleted. 23 This is only one scenario among many. 

An Annual Growth of 1 Percent Implies Major Social Change 

In my view, the most important point—more important than the specific 
growth rate prediction (since, as I have shown, any attempt to reduce long¬ 
term growth to a single figure is largely illusory)—is that a per capita output 
growth rate on the order of 1 percent is in fact extremely rapid, much more 
rapid than many people think. 

The right way to look at the problem is once again in generational terms. 
Over a period of thirty years, a growth rate of 1 percent per year corresponds 
to cumulative growth of more than 35 percent. A growth rate of 1.5 percent 
per year corresponds to cumulative growth of more than 30 percent. In prac¬ 
tice, this implies major changes in lifestyle and employment. Concretely, per 
capita output growth in Europe, North America, and Japan over the past 
thirty years has ranged between 1 and 1.5 percent, and people’s lives have been 
subjected to major changes. In 1980 there was no Internet or cell phone net¬ 
work, most people did not travel by air, most of the advanced medical tech¬ 
nologies in common use today did not yet exist, and only a minority attended 
college. In the areas of communication, transportation, health, and education, 
the changes have been profound. These changes have also had a powerful im¬ 
pact on the structure of employment: when output per head increases by 35 to 
50 percent in thirty years, that means that a very large fraction—between a 


95 


INCOME AND CAPITAL 


quarter and a third—of what is produced today, and therefore between a 
quarter and a third of occupations and jobs, did not exist thirty years ago. 

What this means is that today’s societies are very different from the societ¬ 
ies of the past, when growth was close to zero, or barely o.i percent per year, as 
in the eighteenth century. A society in which growth is o.1-0.2 percent per 
year reproduces itself with little or no change from one generation to the next: 
the occupational structure is the same, as is the property structure. A society 
that grows at 1 percent per year, as the most advanced societies have done 
since the turn of the nineteenth century, is a society that undergoes deep and 
permanent change. This has important consequences for the structure of so¬ 
cial inequalities and the dynamics of the wealth distribution. Growth can 
create new forms of inequality: for example, fortunes can be amassed very 
quickly in new sectors of economic activity. At the same time, however, growth 
makes inequalities of wealth inherited from the past less apparent, so that in¬ 
herited wealth becomes less decisive. To be sure, the transformations entailed 
by a growth rate of 1 percent are far less sweeping than those required by a rate 
of 3-4 percent, so that the risk of disillusionment is considerable—a reflec¬ 
tion of the hope invested in a more just social order, especially since the En¬ 
lightenment. Economic growth is quite simply incapable of satisfying this 
democratic and meritocratic hope, which must create specific institutions for 
the purpose and not rely solely on market forces or technological progress. 

The Posterity of the Postwar Period: 

Entangled Transatlantic Destinies 

Continental Europe and especially France have entertained considerable nos¬ 
talgia for what the French call the Trente Glorieuses, the thirty years from the 
late 1940s to the late 1970s during which economic growth was unusually 
rapid. People still do not understand what evil spirit condemned them to such 
a low rate of growth beginning in the late 1970s. Even today, many people 
believe that the last thirty (soon to be thirty-five or forty) “pitiful years” will 
soon come to an end, like a bad dream, and things will once again be as they 
were before. 

In fact, when viewed in historical perspective, the thirty postwar years 
were the exceptional period, quite simply because Europe had fallen far behind 
the United States over the period 1914-1945 but rapidly caught up during the 


96 


Growth rate of per capita GDP 


growth: illusions and realities 



figure 2.3. The growth rate of per capita output since the Industrial Revolution 
The growth rate of per capita output surpassed 4 percent per year in Europe between 
1950 and 1970, before returning to American levels. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


Trente Glorieuses. Once this catch-up was complete, Europe and the United 
States both stood at the global technological frontier and began to grow at 
the same relatively slow pace, characteristic of economics at the frontier. 

A glance at Figure 2.3, which shows the comparative evolution of Euro¬ 
pean and North American growth rates, will make this point clear. In North 
America, there is no nostalgia for the postwar period, quite simply because 
the Trente Glorieuses never existed there: per capita output grew at roughly 
the same rate of 1.5-2 percent per year throughout the period 1820-2012. To 
be sure, growth slowed a bit between 1930 and 1950 to just over 1.5 percent, 
then increased again to just over 2 percent between 1950 and 1970, and then 
slowed to less than 1.5 percent between 1990 and 2012. In Western Europe, 
which suffered much more from the two world wars, the variations are con¬ 
siderably greater: per capita output stagnated between 1913 and 1950 (with a 
growth rate of just over 0.5 percent) and then leapt ahead to more than 4 per¬ 
cent from 1950 to 1970, before falling sharply to just slightly above US levels (a 
little more than 2 percent) in the period 1970-1990 and to barely 1.5 percent 
between 1990 and 2012. 


97 






























INCOME AND CAPITAL 


Western Europe experienced a golden age of growth between 1950 and 
1970, only to see its growth rate diminish to one-half or even one-third of its 
peak level during the decades that followed. Note that Figure 2.3 underesti¬ 
mates the depth of the fall, because I included Britain in Western Europe (as 
it should be), even though British growth in the twentieth century adhered 
fairly closely to the North American pattern of quasi stability. If we looked 
only at continental Europe, we would find an average per capita output growth 
rate of 5 percent between 1930 and 1970—a level well beyond that achieved 
in other advanced countries over the past two centuries. 

These very different collective experiences of growth in the twentieth cen¬ 
tury largely explain why public opinion in different countries varies so widely 
in regard to commercial and financial globalization and indeed to capitalism 
in general. In continental Europe and especially France, people quite natu¬ 
rally continue to look on the first three postwar decades—a period of strong 
state intervention in the economy—as a period blessed with rapid growth, 
and many regard the liberalization of the economy that began around 1980 as 
the cause of a slowdown. 

In Great Britain and the United States, postwar history is interpreted quite 
differently. Between 1950 and 1980, the gap between the English-speaking 
countries and the countries that had lost the war closed rapidly. By the late 
1970s, US magazine covers often denounced the decline of the United States 
and the success of German and Japanese industry. In Britain, GDP per capita 
fell below the level of Germany, France, Japan, and even Italy. It may even be 
the case that this sense of being rivaled (or even overtaken in the case of Brit¬ 
ain) played an important part in the “conservative revolution.” Margaret 
Thatcher in Britain and Ronald Reagan in the United States promised to “roll 
back the welfare state” that had allegedly sapped the animal spirits of Anglo- 
Saxon entrepreneurs and thus to return to pure nineteenth-century capital¬ 
ism, which would allow the United States and Britain to regain the upper 
hand. Even today, many people in both countries believe that the conservative 
revolution was remarkably successful, because their growth rates once again 
matched continental European and Japanese levels. 

In fact, neither the economic liberalization that began around 1980 nor 
the state interventionism that began in 1945 deserves such praise or blame. 
France, Germany, and Japan would very likely have caught up with Britain 
and the United States following their collapse of 1914-1945 regardless of what 


98 


growth: illusions and realities 


policies they had adopted (I say this with only slight exaggeration). The most 
one can say is that state intervention did no harm. Similarly, once these coun¬ 
tries had attained the global technological frontier, it is hardly surprising that 
they ceased to grow more rapidly than Britain and the United States or that 
growth rates in all of these wealthy countries more or less equalized, as Figure 
2.3 shows (I will come back to this). Broadly speaking, the US and British 
policies of economic liberalization appear to have had little effect on this 
simple reality, since they neither increased growth nor decreased it. 

The Double Bell Curve of Global Growth 

To recapitulate, global growth over the past three centuries can be pictured as 
a bell curve with a very high peak. In regard to both population growth and 
per capita output growth, the pace gradually accelerated over the course of the 
eighteenth and nineteenth centuries, and especially the twentieth, and is now 
most likely returning to much lower levels for the remainder of the twenty- 
first century. 

There are, however, fairly clear differences between the two bell curves. If 
we look at the curve for population growth, we see that the rise began much 
earlier, in the eighteenth century, and the decrease also began much earlier. 
Here we see the effects of the demographic transition, which has already 
largely been completed. The rate of global population growth peaked in the 
period 1950-1970 at nearly 2 percent per year and since then has decreased 
steadily. Although one can never be sure of anything in this realm, it is likely 
that this process will continue and that global demographic growth rates will 
decline to near zero in the second half of the twenty-first century. The shape 
of the bell curve is quite well defined (see Figure 2.2). 

When it comes to the growth rate of per capita output, things are more 
complicated. It took longer for “economic” growth to take off: it remained 
close to zero throughout the eighteenth century, began to climb only in the 
nineteenth, and did not really become a shared reality until the twentieth. 
Global growth in per capita output exceeded 2 percent between 1950 and 1990, 
notably thanks to European catch-up, and again between 1990 and 2012, thanks 
to Asian and especially Chinese catch-up, with growth in China exceeding 9 
percent per year in that period, according to official statistics (a level never 
before observed ). 24 


99 


INCOME AND CAPITAL 



FIGURE 2.4. The growth rate ofworld per capita output from Antiquity to 2100 
The growth rate of per capita output surpassed 2 percent from 1950 to 2012. If the con¬ 
vergence process goes on, it will surpass 2.5 percent from 2012 to 2050, and then will 
drop below 1.5 percent. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


What will happen after 2012? In Figure 2.4 I have indicated a “median” 
growth prediction. In fact, this is a rather optimistic forecast, since I have as¬ 
sumed that the richest countries (Western Europe, North America, and Ja¬ 
pan) will grow at a rate of 1.2 percent from 2012 to 2100 (markedly higher 
than many other economists predict), while poor and emerging countries will 
continue the convergence process without stumbling, attaining growth of 5 
percent per year front 2012 to 2030 and 4 percent from 2030 to 2050. If this 
were to occur as predicted, per capita output in China, Eastern Europe, South 
America, North Africa, and the Middle East would match that of the wealthi¬ 
est countries by 2050. 25 After that, the distribution of global output described 
in Chapter 1 would approximate the distribution of the population. 26 

In this optimistic median scenario, global growth of per capita output 
would slightly exceed 2.5 percent per year between 2012 and 2030 and again 
between 2030 and 2050, before falling below 1.5 percent initially and then 
declining to around 1.2 percent in the final third of the century. By compari¬ 
son with the bell curve followed by the rate of demographic growth (Figure 2.2), 
this second bell curve has two special features. First, it peaks much later than 


100 





































growth: illusions and realities 



o- iooo- 1500- 1700- 1810- 1913- 1950- 1990- 2012- 2030- 1050- 2070- 
IOOO 1500 1700 1820 1913 1950 1990 2012 2030 2050 2070 2100 

FIGURE 2.5. The growth rate of world output from Antiquity to 2100 
The growth rate of world output surpassed 4 percent from 1950 to 1990. If the conver¬ 
gence process goes on, it will drop below 2 percent by 2050. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


the first one (almost a century later, in the middle of the twenty-first century 
rather than the twentieth), and second, it does not decrease to zero or near¬ 
zero growth but rather to a level just above 1 percent per year, which is much 
higher than the growth rate of traditional societies (see Figure 2.4). 

By adding these two curves, we can obtain a third curve showing the rate 
of growth of total global output (Figure 2.5). Until 1950, this had always been 
less than 2 percent per year, before leaping to 4 percent in the period 1950- 
1990, an exceptionally high level that reflected both the highest demographic 
growth rate in history and the highest growth rate in output per head. The 
rate of growth of global output then began to fall, dropping below 3.5 per¬ 
cent in the period 1990-2012, despite extremely high growth rates in emerg¬ 
ing countries, most notably China. According to my median scenario, this 
rate will continue through 2030 before dropping to 3 percent in 2030-2050 
and then to roughly 1.5 percent during the second half of the twenty-first 
century. 


101 













































INCOME AND CAPITAL 


I have already conceded that these “median” forecasts are highly hypo¬ 
thetical. The key point is that regardless of the exact dates and growth rates 
(details that are obviously important), the two bell curves of global growth 
are in large part already determined. The median forecast shown on Figures 
2.2-5 is optimistic in two respects: first, because it assumes that productivity 
growth in the wealthy countries will continue at a rate of more than 1 percent 
per year (which assumes significant technological progress, especially in the 
area of clean energy), and second, perhaps more important, because it assumes 
that emerging economies will continue to converge with the rich economies, 
without major political or military impediments, until the process is com¬ 
plete, around 2050, which is very rapid. It is easy to imagine less optimistic 
scenarios, in which case the bell curve of global growth could fall faster to 
levels lower than those indicated on these graphs. 

The Question of Inflation 

The foregoing overview of growth since the Industrial Revolution would be 
woefully incomplete if I did not discuss the question of inflation. Some would 
say that inflation is a purely monetary phenomenon with which we do not 
need to concern ourselves. In fact, all the growth rates I have discussed thus 
far are so-called real growth rates, which are obtained by subtracting the rate 
of inflation (derived from the consumer price index) from the so-called nomi¬ 
nal growth rate (measured in terms of consumer prices). 

In reality, inflation plays a key role in this investigation. As noted, the use 
of a price index based on “averages” poses a problem, because growth always 
bring forth new goods and services and leads to enormous shifts in relative 
prices, which are difficult to summarize in a single index. As a result, the con¬ 
cepts of inflation and growth are not always very well defined. The decompo¬ 
sition of nominal growth (the only kind that can be observed with the naked 
eye, as it were) into a real component and an inflation component is in part 
arbitrary and has been the source of numerous controversies. 

For example, if the nominal growth rate is 3 percent per year and prices 
increase by 2 percent, then we say that the real growth rate is 1 percent. But if 
we revise the inflation estimate downward because, for example, we believe 
that the real price of smartphones and tablets has decreased much more than 


102 


growth: illusions and realities 


we thought previously (given the considerable increase in their quality and 
performance, which statisticians try to measure carefully—no mean feat), so 
that we now think that prices rose by only 1.5 percent, then we conclude that 
the real growth rate is 1.5 percent. In fact, when differences are this small, it is 
difficult to be certain about the correct figure, and each estimate captures 
part of the truth: growth was no doubt closer to 1.5 percent for aficionados of 
smartphones and tablets and closer to 1 percent for others. 

Relative price movements can play an even more decisive role in Ricardo’s 
theory based on the principle of scarcity: if certain prices, such as those for 
land, buildings, or gasoline, rise to very high levels for a prolonged period of 
time, this can permanently alter the distribution of wealth in favor of those 
who happen to be the initial owners of those scarce resources. 

In addition to the question of relative prices, I will show that inflation 
per se—that is, a generalized increase of all prices—can also play a fundamen¬ 
tal role in the dynamics of the wealth distribution. Indeed, it was essentially 
inflation that allowed the wealthy countries to get rid of the public debt they 
owed at the end of World War II. Inflation also led to various redistributions 
among social groups over the course of the twentieth century, often in a cha¬ 
otic, uncontrolled manner. Conversely, the wealth-based society that flour¬ 
ished in the eighteenth and nineteenth centuries was inextricably linked to 
the very stable monetary conditions that persisted over this very long period. 

The Great Monetary Stability of the Eighteenth and 
Nineteenth Centuries 

To back up a bit: the first crucial fact to bear in mind is that inflation is largely 
a twentieth-century phenomenon. Before that, up to World War I, inflation 
was zero or close to it. Prices sometimes rose or fell sharply for a period of 
several years or even decades, but these price movements generally balanced 
out in the end. This was the case in all countries for which we possess long- 
run price series. 

More precisely, if we look at average price increases over the periods 1700- 
1820 and 1820-1913, we find that inflation was insignificant in France, Brit¬ 
ain, the United States, and Germany: at most 0.2-0.3 percent per year. We 
even find periods of slightly negative price movements: for example, Britain 


103 


INCOME AND CAPITAL 


and the United States in the nineteenth century (—0.2 percent per year if we 
average the two cases between 1820 and 1913). 

To be sure, there were a few exceptions to the general rule of monetary 
stability, but each of them was short-lived, and the return to normal came 
quickly, as though it were inevitable. One particularly emblematic case was 
that of the French Revolution. Late in 1789, the revolutionary government 
issued its famous assignats, which became a true circulating currency and 
medium of exchange by 1790 or 1791. It was one of the first historical exam¬ 
ples of paper money. This gave rise to high inflation (measured in assignats) 
until 1794 or 1793. The important point, however, is that the return to metal 
coinage, after creation of the franc germinal, took place at the same parity as 
the currency of the Ancien Regime. The law of 18 germinal, Year III (April 7, 
1795), did away with the old livre tournois (which reminded people too much 
of the monarchy) and replaced it with the franc, which became the country’s 
new official monetary unit. It had the same metal content as its predecessor. A 
i-franc coin was supposed to contain exactly 4.3 grams of fine silver (as the 
livre tournois had done since 1726). This was confirmed by the law of 1796 
and again by the law of 1803, which permanently established bimetallism in 
France (based on gold and silver ). 27 

Ultimately, prices measured in francs in the period 1800-1810 were roughly 
the same as prices expressed in livres tournois in the period 1770-1780, so 
that the change of monetary unit during the Revolution did not alter the 
purchasing power of money in any way. The novelists of the early nineteenth 
century, starting with Balzac, moved constantly from one unit to another 
when characterizing income and wealth: for contemporary readers, the 
franc germinal (or “franc-or”) and livre tournois were one and the same. 
For Pere Goriot, “a thousand two hundred livres” of rent was perfectly 
equivalent to “twelve hundred francs,” and no further specification was 
needed. 

The gold value of the franc set in 1803 was not officially changed until June 
23, 1928, when a new monetary law was adopted. In fact, the Banque de 
France had been relieved of the obligation to exchange its notes for gold or 
silver since August 1914, so that the “franc-or” had already become a “paper 
franc” and remained such until the monetary stabilization of 1926-1928. Nev¬ 
ertheless, the same parity with metal remained in effect from 1726 to 1914 —a 
not insignificant period of time. 


104 


growth: illusions and realities 


We find the same degree of monetary stability in the British pound ster¬ 
ling. Despite slight adjustments, the conversion rate between French and Brit¬ 
ish currencies remained quite stable for two centuries: the pound sterling 
continued to be worth 20-25 livres tournois or francs germinal from the eigh¬ 
teenth century until 1914. 28 For British novelists of the time, the pound ster¬ 
ling and its strange offspring, such as shillings and guineas, seemed as solid as 
marble, just as the livre tournois and franc-or did to French novelists. 29 Each 
of these units seemed to measure quantities that did not vary with time, thus 
laying down markers that bestowed an aura of eternity on monetary magni¬ 
tudes and a kind of permanence to social distinctions. 

The same was true in other countries: the only major changes concerned 
the definition of new units of currency or the creation of new currencies, such 
as the US dollar in 1775 and the gold mark in 1873. But once the parities with 
metal were set, nothing changed: in the nineteenth and early twentieth cen¬ 
turies, everyone knew that a pound sterling was worth about 5 dollars, 20 
marks, and 25 francs. The value of money had not changed for decades, and no 
one saw any reason to think it would be different in the future. 

The Meaning of Money in Literary Classics 

In eighteenth- and nineteenth-century novels, money was everywhere, not 
only as an abstract force but above all as a palpable, concrete magnitude. 
Writers frequently described the income and wealth of their characters in 
francs or pounds, not to overwhelm us with numbers but because these quan¬ 
tities established a character’s social status in the mind of the reader. Everyone 
knew what standard of living these numbers represented. 

These monetary markers were stable, moreover, because growth was rela¬ 
tively slow, so that the amounts in question changed only very gradually, over 
many decades. In the eighteenth century, per capita income grew very slowly. 
In Great Britain, the average income was on the order of 30 pounds a year in 
the early 1800s, when Jane Austen wrote her novels . 30 The same average in¬ 
come could have been observed in 1720 or 1770. Hence these were very stable 
reference points, with which Austen had grown up. She knew that to live 
comfortably and elegantly, secure proper transportation and clothing, eat 
well, and find amusement and a necessary minimum of domestic servants, 
one needed—by her lights—at least twenty to thirty times that much. The 


105 


INCOME AND CAPITAL 


characters in her novels consider themselves free from need only if they dis¬ 
pose of incomes of 500 to 1,000 pounds a year. 

I will have a lot more to say about the structure of inequality and standards 
of living that underlies these realities and perceptions, and in particular about 
the distribution of wealth and income that flowed from them. At this stage, 
the important point is that absent inflation and in view of very low growth, these 
sums reflect very concrete and stable realities. Indeed, a half century later, in the 
1850s, the average income was barely 40-50 pounds a year. Readers probably 
found the amounts mentioned by Jane Austen somewhat too small to live com¬ 
fortably but were not totally confused by them. By the turn of the twentieth 
century, the average income in Great Britain had risen to 80-90 pounds a year. 
The increase was noticeable, but annual incomes of 1,000 pounds or more—the 
kind that Austen talked about—still marked a significant divide. 

We find the same stability of monetary references in the French novel. In 
France, the average income was roughly 400-500 francs per year in the pe¬ 
riod 1810-1820, in which Balzac set Pere Goriot. Expressed in livres tournois, 
the average income was just slightly lower in the Ancien Regime. Balzac, like 
Austen, described a world in which it took twenty to thirty times that much 
to live decently: with an income of less than 10-20,000 francs, a Balzacian 
hero would feel that he lived in misery. Again, these orders of magnitude 
would change only very gradually over the course of the nineteenth century 
and into the Belle Epoque: they would long seem familiar to readers. 31 These 
amounts allowed the writer to economically set the scene, hint at a way of life, 
evoke rivalries, and, in a word, describe a civilization. 

One could easily multiply examples by drawing on American, German, 
and Italian novels, as well as on the literature of all the other countries that 
experienced this long period of monetary stability. Until World War I, money 
had meaning, and novelists did not fail to exploit it, explore it, and turn it 
into a literary subject. 

The Loss of Monetary Bearings in the Twentieth Century 

This world collapsed for good with World War I. To pay for this war of ex¬ 
traordinary violence and intensity, to pay for soldiers and for the ever more 
costly and sophisticated weapons they used, governments went deeply into 
debt. As early as August 1914, the principal belligerents ended the convert- 

106 


growth: illusions and realities 


ibility of their currency into gold. After the war, all countries resorted to one 
degree or another to the printing press to deal with their enormous public 
debts. Attempts to reintroduce the gold standard in the 1920s did not survive 
the crisis of the 1930s: Britain abandoned the gold standard in 1931, the United 
States in 1933, France in 1936. The post-World War II gold standard would 
prove to be barely more robust: established in 1946, it ended in 1971 when the 
dollar ceased to be convertible into gold. 

Between 1913 and 1950, inflation in France exceeded 13 percent per year (so 
that prices rose by a factor of 100), and inflation in Germany was 17 percent 
per year (so that prices rose by a factor of more than 300). In Britain and the 
United States, which suffered less damage and less political destabilization 
from the two wars, the rate of inflation was significantly lower: barely 3 per¬ 
cent per year in the period 1913-1950. Yet this still means that prices were 
multiplied by three, following two centuries in which prices had barely moved 
at all. 

In all countries the shocks of the period 1914-1945 disrupted the mone¬ 
tary certitudes of the prewar world, not least because the inflationary process 
unleashed by war has never really ended. 

We see this very clearly in Figure 2 .6, which shows the evolution of infla¬ 
tion by subperiod for four countries in the period 1700-2012. Note that infla¬ 
tion ranged between 2 and 6 percent per year on average from 1950 to 1970, 
before rising sharply in the 1970s to the point where average inflation reached 
10 percent in Britain and 8 percent in France in the period 1970-1990, despite 
the beginnings of significant disinflation nearly everywhere after 1980. If we 
compare this behavior of inflation with that of the previous decades, it is 
tempting to think that the period 1990-2012, with average inflation of around 
2 percent in the four countries (a little less in Germany and France, a little 
more in Britain and the United States), signified a return to the zero inflation 
of the pre-World War I years. 

To make this inference, however, one would have to forget that infla¬ 
tion of 2 percent per year is quite different from zero inflation. If we add 
annual inflation of 2 percent to real growth of 1-2 percent, then all of our key 
amounts—output, income, wages—must be increasing 3-4 percent a year, so 
that after ten or twenty years, the sums we are dealing with will bear no rela¬ 
tion to present quantities. Who remembers the prevailing wages of the late 
1980s or early 1990s? Furthermore, it is perfectly possible that this inflation of 


107 


INCOME AND CAPITAL 



1820 1870 1913 1950 1970 1990 2012 

FIGURE 2.6. Inflation since the Industrial Revolution 

Inflation in the rich countries was zero in the eighteenth and nineteenth centuries, 
high in the twentieth century, and roughly 2 percent ayear since 1990. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


2 percent per year will rise somewhat in the coming years, in view of the 
changes in monetary policy that have taken place since 2007-2008, especially 
in Britain and the United States. The monetary regime today differs signifi¬ 
cantly from the monetary regime in force a century ago. It is also interesting 
to note that Germany and France, the two countries that resorted most to 
inflation in the twentieth century, and more specifically between 1913 and 
1930, today seem to be the most hesitant when it comes to using inflationary 
policy. What is more, they built a monetary zone, the Eurozone, that is based 
almost entirely on the principle of combating inflation. 

I will have more to say later about the role played by inflation in the dy¬ 
namics of wealth distribution, and in particular about the accumulation and 
distribution of fortunes, in various periods of time. 

At this stage, I merely want to stress the fact that the loss of stable mone¬ 
tary reference points in the twentieth century marks a significant rupture 
with previous centuries, not only in the realms of economics and politics but 
also in regard to social, cultural, and literary matters. It is surely no accident 

108 






























growth: illusions and realities 


that money—at least in the form of specific amounts—virtually disappeared 
from literature after the shocks of 1914-1945. Specific references to wealth 
and income were omnipresent in the literature of all countries before 1914; 
these references gradually dropped out of sight between 1914 and 1945 and 
never truly reemerged. This is true not only of European and American novels 
but also of the literature of other continents. The novels of Naguib Mahfouz, 
or at any rate those that unfold in Cairo between the two world wars, before 
prices were distorted by inflation, lavish attention on income and wealth as a 
way of situating characters and explaining their anxieties. We are not far from 
the world of Balzac and Austen. Obviously, the social structures are very differ¬ 
ent, but it is still possible to orient perceptions, expectations, and hierarchies in 
relation to monetary references. The novels of Orhan Pamuk, set in Istanbul in 
the 1970s, that is, in a period during which inflation had long since rendered the 
meaning of money ambiguous, omit mention of any specific sums. In Snow, 
Pamuk even has his hero, a novelist like himself, say that there is nothing more 
tiresome for a novelist than to speak about money or discuss last year’s prices 
and incomes. The world has clearly changed a great deal since the nineteenth 
century. 


109 



PART TWO 


THE DYNAMICS OF THE 
CAPITAL/INCOME RATIO 




{ THREE } 


The Metamorphoses of Capital 


In Part One, I introduced the basic concepts of income and capital and reviewed 
the main stages of income and output growth since the Industrial Revolution. 

In this part, I am going to concentrate on the evolution of the capital 
stock, looking at both its overall size, as measured by the capital/income ratio, 
and its breakdown into different types of assets, whose nature has changed 
radically since the eighteenth century. I will consider various forms of wealth 
(land, buildings, machinery, firms, stocks, bonds, patents, livestock, gold, nat¬ 
ural resources, etc.) and examine their development over time, starting with 
Great Britain and France, the countries about which we possess the most in¬ 
formation over the long run. But first I want to take a brief detour through 
literature, which in the cases of Britain and France offers a very good intro¬ 
duction to the subject of wealth. 

The Nature of Wealth: From Literature to Reality 

When Honore de Balzac and Jane Austen wrote their novels at the beginning 
of the nineteenth century, the nature of wealth was relatively clear to all read¬ 
ers. Wealth seemed to exist in order to produce rents, that is, dependable, 
regular payments to the owners of certain assets, which usually took the form 
of land or government bonds. Pere Goriot owned the latter, while the small 
estate of the Rastignacs consisted of the former. The vast Norland estate that 
John Dashwood inherits in Sense and Sensibility is also agricultural land, 
from which he is quick to expel his half-sisters Elinor and Marianne, who 
must make do with the interest on the small capital in government bonds left 
to them by their father. In the classic novels of the nineteenth century, wealth 
is everywhere, and no matter how large or small the capital, or who owns it, it 
generally takes one of two forms: land or government bonds. 

From the perspective of the twenty-first century, these types of assets 
may seem old-fashioned, and it is tempting to consign them to the remote 


113 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


and supposedly vanished past, unconnected with the economic and social re¬ 
alities of the modern era, in which capital is supposedly more “dynamic.” In¬ 
deed, the characters in nineteenth-century novels often seem like archetypes 
of the rentier, a suspect figure in the modern era of democracy and meritoc¬ 
racy. Yet what could be more natural to ask of a capital asset than that it pro¬ 
duce a reliable and steady income: that is in fact the goal of a “perfect” capital 
market as economists define it. It would be quite wrong, in fact, to assume 
that the study of nineteenth-century capital has nothing to teach us today. 

When we take a closer look, the differences between the nineteenth and 
twenty-first centuries are less apparent than they might seem at first glance. 
In the first place, the two types of capital asset—land and government 
bonds—raise very different issues and probably should not be added together 
as cavalierly as nineteenth-century novelists did for narrative convenience. 
Ultimately, a government bond is nothing more than a claim of one portion 
of the population (those who receive interest) on another (those who pay 
taxes): it should therefore be excluded from national wealth and included 
solely in private wealth. The complex question of government debt and the 
nature of the wealth associated with it is no less important today than it was 
in 1800, and by studying the past we can learn a lot about an issue of great 
contemporary concern. Although today’s public debt is nowhere near the as¬ 
tronomical levels attained at the beginning of the nineteenth century, at least 
in Britain, it is at or near a historical record in France and many other coun¬ 
tries and is probably the source of as much confusion today as in the Napole¬ 
onic era. The process of financial intermediation (whereby individuals deposit 
money in a bank, which then invests it elsewhere) has become so complex that 
people are often unaware of who owns what. To be sure, we are in debt. How 
can we possibly forget it, when the media remind us every day? But to whom 
exactly do we owe money? In the nineteenth century, the rentiers who lived 
off the public debt were clearly identified. Is that still the case today? This 
mystery needs to be dispelled, and studying the past can help us do so. 

There is also another, even more important complication: many other 
forms of capital, some of them quite “dynamic,” played an essential role not 
only in classic novels but in the society of the time. After starting out as a 
noodle maker, Pere Goriot made his fortune as a pasta manufacturer and 
grain merchant. During the wars of the revolutionary and Napoleonic eras, 
he had an unrivaled eye for the best flour and a knack for perfecting pasta 


114 


THE METAMORPHOSES OF CAPITAL 


production technologies and setting up distribution networks and ware¬ 
houses so that he could deliver the right product to the right place at the right 
time. Only after making a fortune as an entrepreneur did he sell his share of 
the business, much in the manner of a twenty-first-century startup founder 
exercising his stock options and pocketing his capital gains. Goriot then in¬ 
vested the proceeds in safer assets: perpetual government bonds that paid in¬ 
terest indefinitely. With this capital he was able to arrange good marriages 
for his daughters and secure an eminent place for them in Parisian high soci¬ 
ety. On his deathbed in 1821, abandoned by his daughters Delphine and An- 
astasie, old Goriot still dreamt of juicy investments in the pasta business in 
Odessa. 

Cesar Birotteau, another Balzac character, made his money in perfumes. 
He was the ingenious inventor of any number of beauty products—Sultan’s 
Cream, Carminative Water, and so on—that Balzac tells us were all the rage 
in late imperial and Restoration France. But this was not enough for him: 
when the time came to retire, he sought to triple his capital by speculating 
boldly on real estate in the neighborhood of La Madeleine, which was devel¬ 
oping rapidly in the 1820s. After rejecting the sage advice of his wife, who 
urged hint to invest in good farmland near Chinon and government bonds, 
he ended in ruin. 

Jane Austen’s heroes were more rural than Balzac’s. Prosperous landown¬ 
ers all, they were nevertheless wiser than Balzac’s characters in appearance 
only. In Mansfield Park, Fanny’s uncle, Sir Thomas, has to travel out to the 
West Indies for a year with his eldest son for the purpose of managing his affairs 
and investments. After returning to Mansfield, he is obliged to set out once 
again for the islands for a period of many months. In the early 1800s it was by 
no means simple to manage plantations several thousand miles away. Tending 
to one’s wealth was not a tranquil matter of collecting rent on land or interest 
on government debt. 

So which was it: quiet capital or risky investments? Is it safe to conclude 
that nothing has really changed since 1800? What actual changes have oc¬ 
curred in the structure of capital since the eighteenth century? Pere Goriot’s 
pasta may have become Steve Jobs’s tablet, and investments in the West Indies 
in 1800 may have become investments in China or South Africa in 2010, but 
has the deep structure of capital really changed? Capital is never quiet: it is 
always risk-oriented and entrepreneurial, at least at its inception, yet it always 


115 


Value of national capital (% national income) 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 



figure 3.1. Capital in Britain, 1700-2010 

National capital is worth about seven years of national income in Britain in 1700 (in¬ 
cluding four in agricultural land). 

Sources and series: see piketty.pse.ens.fr/capital21c. 


tends to transform itself into rents as it accumulates in large enough 
amounts—that is its vocation, its logical destination. What, then, gives us the 
vague sense that social inequality today is very different from social inequality 
in the age of Balzac and Austen? Is this just empty talk with no purchase on 
reality, or can we identify objective factors to explain why some people think 
that modern capital has become more “dynamic” and less “rent-seeking?” 

The Metamorphoses of Capital in Britain and France 

I will begin by looking at changes in the capital structure of Britain and France 
since the eighteenth century. These are the countries for which we possess the 
richest historical sources and have therefore been able to construct the most 
complete and homogeneous estimates over the long run. The principal results 
of this work are shown in Figures 3.1 and 3.2, which attempt to summarize 
several key aspects of three centuries in the history of capitalism. Two clear 
conclusions emerge. 

116 



























Value of national capital (% national income) 


THE METAMORPHOSES OF CAPITAL 



FIGURE 3.2. Capital in France, 1700-2010 

National capital is worth almost seven years of national income in France in 1910 (in¬ 
cluding one invested abroad). 

Sources and series: see piketty.pse.ens.fr/capital21c. 


We find, to begin with, that the capital/income ratio followed quite simi¬ 
lar trajectories in both countries, remaining relatively stable in the eighteenth 
and nineteenth centuries, followed by an enormous shock in the twentieth 
century, before returning to levels similar to those observed on the eve of 
World War I. In both Britain and France, the total value of national capital 
fluctuated between six and seven years of national income throughout the 
eighteenth and nineteenth centuries, up to 1914. Then, after World War I, the 
capital/income ratio suddenly plummeted, and it continued to fall during the 
Depression and World War II, to the point where national capital amounted 
to only two or three years of national income in the 1950s. The capital/income 
ratio then began to climb and has continued to do so ever since. In both coun¬ 
tries, the total value of national capital in 2010 is roughly five to six years’ 
worth of national income, indeed a bit more than six in France, compared 
with less than four in the 1980s and barely more than two in the 1950s. The 
measurements are of course not perfectly precise, but the general shape of the 
curve is clear. 


117 

























THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


In short, what we see over the course of the century just past is an impres¬ 
sive “U-shaped curve.” The capital/income ratio fell by nearly two-thirds be¬ 
tween 1914 and 1945 and then more than doubled in the period 1945-2012. 

These are very large swings, commensurate with the violent military, politi¬ 
cal, and economic conflicts that marked the twentieth century. Capital, private 
property, and the global distribution of wealth were key issues in these conflicts. 
The eighteenth and nineteenth centuries look tranquil by comparison. 

In the end, by 2010, the capital/income ratio had returned to its pre- 
World War I level—or even surpassed it if we divide the capital stock by 
disposable household income rather than national income (a dubious meth¬ 
odological choice, as will be shown later). In any case, regardless of the imper¬ 
fections and uncertainties of the available measures, there can be no doubt 
that Britain and France in the 1990s and 2000s regained a level of wealth not 
seen since the early twentieth century, at the conclusion of a process that 
originated in the 1950s. By the middle of the twentieth century, capital had 
largely disappeared. A little more than half a century later, it seems about to 
return to levels equal to those observed in the eighteenth and nineteenth cen¬ 
turies. Wealth is once again flourishing. Broadly speaking, it was the wars of 
the twentieth century that wiped away the past to create the illusion that 
capitalism had been structurally transformed. 

As important as it is, this evolution of the overall capital/income ratio 
should not be allowed to obscure sweeping changes in the composition of capi¬ 
tal since 1700. This is the second conclusion that emerges clearly from Figures 
3.1 and 3.2. In terms of asset structure, twenty-first-century capital has little in 
common with eighteenth-century capital. The evolutions we see are again 
quite close to what we find happening in Britain and France. To put it simply, 
we can see that over the very long run, agricultural land has gradually been 
replaced by buildings, business capital, and financial capital invested in firms 
and government organizations. Yet the overall value of capital, measured in 
years of national income, has not really changed. 

More precisely, remember that national capital, which is shown in Figures 
3.1 and 3.2, is defined as the sum of private capital and public capital. Govern¬ 
ment debt, which is an asset for the private sector and a liability for the public 
sector, therefore nets out to zero (if each country owns its own government 
debt). As noted in Chapter 1, national capital, so defined, can be decomposed 
into domestic capital and net foreign capital. Domestic capital measures the 


THE METAMORPHOSES OF CAPITAL 


value of the capital stock (buildings, firms, etc.) located within the territory of 
the country in question. Net foreign capital (or net foreign assets) measures 
the wealth of the country in question with respect to the rest of the world, 
that is, the difference between assets owned by residents of the country in the 
rest of the world and assets owned by the rest of the world in the country in 
question (including assets in the form of government bonds). 

Domestic capital can in turn be broken down into three categories: farm¬ 
land, housing (including the value of the land on which buildings stand), and 
other domestic capital, which covers the capital of firms and government or¬ 
ganizations (including buildings used for business and the associated land, 
infrastructure, machinery, computers, patents, etc.). These assets, like any as¬ 
set, are evaluated in terms of market value: for example, in the case of a corpo¬ 
ration that issues stock, the value depends on the share price. This leads to the 
following decomposition of national capital, which I have used to create Fig¬ 
ures 3.1 and 3.2: 

National capital = farmland + housing + other domestic capital 
+ net foreign capital 

A glance at these graphs shows that at the beginning of the eighteenth 
century, the total value of farmland represented four to five years of national 
income, or nearly two-thirds of total national capital. Three centuries later, 
farmland was worth less than 10 percent of national income in both France 
and Britain and accounted for less than 2 percent of total wealth. This impres¬ 
sive change is hardly surprising: agriculture in the eighteenth century accounted 
for nearly three-quarters of all economic activity and employment, com¬ 
pared with just a few percent today. It is therefore natural that the share of 
capital involved in agriculture has evolved in a similar direction. 

This collapse in the value of farmland (proportionate to national in¬ 
come and national capital) was counterbalanced on the one hand by a rise in 
the value of housing, which rose from barely one year of national income in 
the eighteenth century to more than three years today, and on the other hand 
by an increase in the value of other domestic capital, which rose by roughly 
the same amount (actually slightly less, from 1.5 years of national income in 
the eighteenth century to a little less than 3 years today). 1 This very long-term 
structural transformation reflects on the one hand the growing importance of 


119 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


housing, not only in size but also in quality and value, in the process of eco¬ 
nomic and industrial development ; 2 and on the other the very substantial ac¬ 
cumulation since the Industrial Revolution of buildings used for business 
purposes, infrastructure, machinery, warehouses, offices, tools, and other ma¬ 
terial and immaterial capital, all of which is used by firms and government 
organizations to produce all sorts of nonagricultural goods and services . 3 The 
nature of capital has changed: it once was mainly land but has become pri¬ 
marily housing plus industrial and financial assets. Yet it has lost none of its 
importance. 


The Rise and Fall of Foreign Capital 

What about foreign capital? In Britain and France, it evolved in a very dis¬ 
tinctive way, shaped by the turbulent history of these two leading colonial 
powers over the past three centuries. The net assets these two countries owned 
in the rest of the world increased steadily during the eighteenth and nine¬ 
teenth centuries and attained an extremely high level on the eve of World 
War I, before literally collapsing in the period 1914-1945 and stabilizing at a 
relatively low level since then, as Figures 3.1 and 3.2 show. 

Foreign possessions first became important in the period 1750-1800, as 
we know, for instance, from Sir Thomas’s investments in the West Indies in 
Jane Austen’s Mansfield Park. But the share of foreign assets remained mod¬ 
est: when Austen wrote her novel in 1812, they represented, as far as we can tell 
from the available sources, barely 10 percent of Britain’s national income, or 
one-thirtieth of the value of agricultural land (which amounted to more than 
three years of national income). Hence it comes as no surprise to discover that 
most of Austen’s characters lived on the rents from their rural properties. 

It was during the nineteenth century that British subjects began to ac¬ 
cumulate considerable assets in the rest of the world, in amounts previously 
unknown and never surpassed to this day. By the eve of World War I, Britain 
had assembled the world’s preeminent colonial empire and owned foreign 
assets equivalent to nearly two years of national income, or 6 times the total 
value of British farmland (which at that point was worth only 30 percent of 
national income). 4 Clearly, the structure of wealth had been utterly trans¬ 
formed since the time of Mansfield Park, and one has to hope that Austen’s 
heroes and their descendants were able to adjust in time and follow Sir 


120 


THE METAMORPHOSES OF CAPITAL 


Thomas’s lead by investing a portion of their land rents abroad. By the turn of 
the twentieth century, capital invested abroad was yielding around 5 percent a 
year in dividends, interest, and rent, so that British national income was 
about 10 percent higher than its domestic product. A fairly significant social 
group were able to live off this boon. 

France, which commanded the second most important colonial empire, 
was in a scarcely less enviable situation: it had accumulated foreign assets worth 
more than a year’s national income, so that in the first decade of the twentieth 
century its national income was 5-6 percent higher than its domestic prod¬ 
uct. This was equal to the total industrial output of the northern and eastern 
departements, and it came to France in the form of dividends, interest, roy¬ 
alties, rents, and other revenue on assets that French citizens owned in the 
country’s foreign possessions. 5 

It is important to understand that these very large net positions in foreign 
assets allowed Britain and France to run structural trade deficits in the late 
nineteenth and early twentieth century. Between 1880 and 1914, both coun¬ 
tries received significantly more in goods and services from the rest of the 
world than they exported themselves (their trade deficits averaged 1-2 percent 
of national income throughout this period). This posed no problem, because 
their income from foreign assets totaled more than 5 percent of national in¬ 
come. Their balance of payments was thus strongly positive, which enabled 
them to increase their holdings of foreign assets year after year. 6 In other 
words, the rest of the world worked to increase consumption by the colonial 
powers and at the same time became more and more indebted to those same 
powers. This may seem shocking. But it is essential to realize that the goal of 
accumulating assets abroad by way of commercial surpluses and colonial ap¬ 
propriations was precisely to be in a position later to run trade deficits. There 
would be no interest in running trade surpluses forever. The advantage of 
owning things is that one can continue to consume and accumulate without 
having to work, or at any rate continue to consume and accumulate more 
than one could produce on one’s own. The same was true on an international 
scale in the age of colonialism. 

In the wake of the cumulative shocks of two world wars, the Great De¬ 
pression, and decolonization, these vast stocks of foreign assets would eventu¬ 
ally evaporate. In the 1950s, both France and Great Britain found themselves 
with net foreign asset holdings close to zero, which means that their foreign 


121 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


assets were just enough to balance the assets of the two former colonial pow¬ 
ers owned by the rest of the world. Broadly speaking, this situation did not 
change much over the next half century. Between 1950 and 2010, the net for¬ 
eign asset holdings of France and Britain varied from slightly positive to 
slightly negative while remaining quite close to zero, at least when compared 
with the levels observed previously. 7 

Finally, when we compare the structure of national capital in the eigh¬ 
teenth century to its structure now, we find that net foreign assets play a neg¬ 
ligible role in both periods, and that the real long-run structural change is to 
be found in the gradual replacement of farmland by real estate and working 
capital, while the total capital stock has remained more or less unchanged 
relative to national income. 

Income and Wealth: Some Orders of Magnitude 

To sum up these changes, it is useful to take today’s world as a reference point. 
The current per capita national income in Britain and France is on the order 
of 30,000 euros per year, and national capital is about 6 times national income, 
or roughly 180,000 euros per head. In both countries, farmland is virtually 
worthless today (a few thousand euros per person at most), and national capital 
is broadly speaking divided into two nearly equal parts: on average, each citi¬ 
zen has about 90,000 euros in housing (for his or her own use or for rental to 
others) and about 90,000 euros worth of other domestic capital (primarily in 
the form of capital invested in firms by way of financial instruments). 

As a thought experiment, let us go back three centuries and apply the na¬ 
tional capital structure as it existed around 1700 but with the average amounts 
we find today: 30,000 euros annual income per capita and 180,000 euros of 
capital. Our representative French or British citizen would then own around 
120,000 euros worth of land, 30,000 euros worth of housing, and 30,000 eu¬ 
ros in other domestic assets. 8 Clearly, some of these people (for example, Jane 
Austen’s characters: John Dashwood with his Norland estate and Charles 
Darcy with Pemberley) owned hundreds of hectares—capital worth tens or 
hundreds of millions of euros—while many others owned nothing at all. But 
these averages give us a somewhat more concrete idea of the way the structure 
of national capital has been utterly transformed since the eighteenth century 
while preserving roughly the same value in terms of annual income. 


122 


THE METAMORPHOSES OF CAPITAL 


Now imagine this British or French person at the turn of the twentieth 
century, still with an average income of 30,000 euros and an average capital of 
180,000. In Britain, farmland already accounted for only a small fraction of 
this wealth: 10,000 for each British subject, compared with 50,000 euros 
worth of housing and 60,000 in other domestic assets, together with nearly 
60,000 in foreign investments. France was somewhat similar, except that 
each citizen still owned on average between 30,000 and 40,000 euros worth 
of land and roughly the same amount of foreign assets. 9 In both countries, 
foreign assets had taken on considerable importance. Once again, it goes with¬ 
out saying that not everyone owned shares in the Suez Canal or Russian bonds. 
But by averaging over the entire population, which contained many people 
with no foreign assets at all and a small minority with substantial portfolios, 
we are able to measure the vast quantity of accumulated wealth in the rest of 
the world that French and British foreign asset holdings represented. 

Public Wealth, Private Wealth 

Before studying more precisely the nature of the shocks sustained by capital 
in the twentieth century and the reasons for the revival of capital since World 
War II, it will be useful at this point to broach the issue of the public debt, and 
more generally the division of national capital between public and private assets. 
Although it is difficult today, in an age where rich countries tend to accumulate 
substantial public debts, to remember that the public sector balance sheet in¬ 
cludes assets as well as liabilities, we should be careful to bear this fact in mind. 

To be sure, the distinction between public and private capital changes 
neither the total amount nor the composition of national capital, whose evo¬ 
lution I have just traced. Nevertheless, the division of property rights between 
the government and private individuals is of considerable political, economic, 
and social importance. 

I will begin, then, by recalling the definitions introduced in Chapter 1. 
National capital (or wealth) is the sum of public capital and private capital. 
Public capital is the difference between the assets and liabilities of the state (in¬ 
cluding all public agencies), and private capital is of course the difference be¬ 
tween the assets and liabilities of private individuals. Whether public or private, 
capital is always defined as net wealth, that is, the difference between the market 
value of what one owns (assets) and what one owes (liabilities, or debts). 


123 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


Concretely, public assets take two forms. They can be nonfinancial (mean¬ 
ing essentially public buildings, used for government offices or for the provi¬ 
sion of public services, primarily in health and education: schools, universi¬ 
ties, hospitals, etc.) or financial. Governments can own shares in firms, in 
which they can have a majority or minority stake. These firms may be located 
within the nation’s borders or abroad. In recent years, for instance, so-called 
sovereign wealth funds have arisen to manage the substantial portfolios of 
foreign financial assets that some states have acquired. 

In practice, the boundary between financial and nonfinancial assets need 
not be fixed. For example, when the French government transformed France 
Telecom and the French Post Office into shareholder-owned corporations, 
state-owned buildings used by both firms began to be counted as financial 
assets of the state, whereas previously they were counted as nonfinancial 
assets. 

At present, the total value of public assets (both financial and non¬ 
financial) is estimated to be almost one year’s national income in Britain and 
a little less than i 1/2 times that amount in France. Since the public debt of 
both countries amounts to about one year’s national income, net public 
wealth (or capital) is close to zero. According to the most recent official esti¬ 
mates by the statistical services and central banks of both countries, Britain’s 
net public capital is almost exactly zero and France’s is slightly less than 30 
percent of national income (or one-twentieth of total national capital: see 
Table 3.1). 10 

In other words, if the governments of both countries decided to sell off all 
their assets in order to immediately pay off their debts, nothing would be left 
in Britain and very little in France. 

Once again, we should not allow ourselves to be misled by the precision of 
these estimates. Countries do their best to apply the standardized concepts 
and methods established by the United Nations and other international orga¬ 
nizations, but national accounting is not, and never will be, an exact science. 
Estimating public debts and financial assets poses no major problems. By 
contrast, it is not easy to set a precise market value on public buildings (such 
as schools and hospitals) or transportation infrastructure (such as railway 
lines and highways) since these are not regularly sold. In theory, such items 
are priced by observing the sales of similar items in the recent past, but such 


124 


THE METAMORPHOSES OF CAPITAL 


TABLE 3.1. 

Public wealth and private wealth in France in 2012 


Value of capital 
(% national income) a 


Value of capital 
(% national capital) 


National capital (public 
capital + private capital) 


605 



100 

Public capital (net public wealth: 
difference between assets and 

Assets 

3 i 

Debt 

Assets 

5 

Debt 

debt held by government and 
other public agencies) 

145% 


114% 

24% 

19% 

Private capital (net private 
wealth: difference between assets 

Assets 

574 

Debt 

Assets 

95 

Debt 

and debt held by private 
individuals [households]) 

646% 


72% 

107% 

12% 


Note: In zoiz, the total value of national capital in France was equal to 605% of national income (6.05 times national 
income), including 31% for public capital (5% of total) and 574% for private capital (95% of total). 

a. National income is equal to GDP minus capital depreciation plus net foreign income; in practice, it is typically 
equal to about 90% of GDP in France in 2012; see Chapter 1 and the online technical appendix. 

Sources : See piketty.pse.ens.fr/capital21c. 


comparisons are not always reliable, especially since market prices frequently 
fluctuate, sometimes wildly. Hence these figures should be taken as rough es¬ 
timates, not mathematical certainties. 

In any event, there is absolutely no doubt that net public wealth in both 
countries is quite small and certainly insignificant compared with total pri¬ 
vate wealth. Whether net public wealth represents less than i percent of na¬ 
tional wealth, as in Britain, or about 5 percent, as in France, or even 10 percent 
if we assume that the value of public assets is seriously underestimated, is ulti¬ 
mately of little or no importance for present purposes. Regardless of the im¬ 
perfections of measurement, the crucial fact here is that private wealth in 
2010 accounts for virtually all of national wealth in both countries: more 
than 99 percent in Britain and roughly 93 percent in France, according to the 
latest available estimates. In any case, the true figure is certainly greater than 
90 percent. 


125 





Public assets and debt (% national income) 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 



FIGURE 3.3. Public wealth in Britain, 1700-2010 

Public debt surpassed two years of national income in 1950 (versus one year for public 
assets). 

Sources and series: see piketty.pse.ens.fr/capital21c. 


Public Wealth in Historical Perspective 

If we examine the history of public wealth in Britain and France since the 
eighteenth century, as well as the evolution of the public-private division of 
national capital, we find that the foregoing description has almost always 
been accurate (see Figures 3.3-6). To a first approximation, public assets and 
liabilities, and a fortiori the difference between the two, have generally repre¬ 
sented very limited amounts compared with the enormous mass of private 
wealth. In both countries, net public wealth over the past three centuries has 
sometimes been positive, sometimes negative. But the oscillations, which 
have ranged, broadly speaking, between +100 and —100 percent of national 
income (and more often than not between +50 and —30) have all in all been 
limited in amplitude compared to the high levels of private wealth (as much 
as 700-800 percent of national income). 

In other words, the history of the ratio of national capital to national 
income in France and Britain since the eighteenth century, summarized ear¬ 
lier, has largely been the history of the relation between private capital and 
national income (see Figures 3.5 and 3.6). 


126 

























Public assets and debt (% national income) 


THE METAMORPHOSES OF CAPITAL 



figure 3.4. Public wealth in France, 1700-2010 

Public debt is about one year of national income in France in 1780 as well as in 1880 
and in 2000-2010. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


The crucial fact here is of course well known: France and Britain have al¬ 
ways been countries based on private property and never experimented with 
Soviet-style communism, where the state takes control of most capital. Fdence 
it is not surprising that private wealth has always dominated public wealth. 
Conversely, neither country has ever amassed public debts sufficiently large to 
radically alter the magnitude of private wealth. 

With this central fact in mind, it behooves us to push the analysis a bit 
farther. Even though public policy never went to extremes in either country, 
it did have a nonnegligible impact on the accumulation of private wealth at 
several points, and in different directions. 

In eighteenth- and nineteenth-century Britain, the government tended at 
times to increase private wealth by running up large public debts. The French 
government did the same under the Ancien Regime and in the Belle Epoque. 
At other times, however, the government tried to reduce the magnitude of 
private wealth. In France after World War II, public debts were canceled, and 
a large public sector was created; the same was true to a lesser extent in Britain 
during the same period. At present, both countries (along with most other 
wealthy countries) are running large public debts. Historical experience shows, 


127 




































THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 



figure 3.5. Private and public capital in Britain, 1700-2010 

In 1810, private capital is worth eight years of national income in Britain (versus seven 
years for national capital). 

Sources and series: see piketty.pse.ens.fr/capital21c. 



FIGURE 3.6. Private and public capital in France, 1700-2010 

In 1950, public capital is worth almost one year of national income versus two years for 
private capital. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


128 



























































































THE METAMORPHOSES OF CAPITAL 


however, that this can change fairly rapidly. It will therefore useful to lay some 
groundwork by studying historical reversals of policy in Britain and France. 
Both countries offer a rich and varied historical experience in this regard. 

Great Britain: Public Debt and the Reinforcement 
of Private Capital 

I begin with the British case. On two occasions—first at the end of the Napo¬ 
leonic wars and again after World War II—Britain’s public debt attained ex¬ 
tremely high levels, around 200 percent of GDP or even slightly above that. 
Although no country has sustained debt levels as high as Britain’s for a longer 
period of time, Britain never defaulted on its debt. Indeed, the latter fact ex¬ 
plains the former: if a country does not default in one way or another, either 
directly by simply repudiating its debt or indirectly through high inflation, it 
can take a very long time to pay off such a large public debt. 

In this respect, Britain’s public debt in the nineteenth century is a text¬ 
book case. To look back a little farther in time: even before the Revolutionary 
War in America, Britain had accumulated large public debts in the eigh¬ 
teenth century, as had France. Both monarchies were frequently at war, both 
with each other and with other European countries, and they did not manage 
to collect enough in taxes to pay for their expenditures, so that public debt 
rose steeply. Both countries thus managed to amass debts on the order of 50 
percent of national income in the period 1700-1720 and too percent of na¬ 
tional income in the period 1760-1770. 

The French monarchy’s inability to modernize its tax system and elimi¬ 
nate the fiscal privileges of the nobility is well known, as is the ultimate revo¬ 
lutionary resolution, initiated by the convocation of the Estates General in 
1789, that led eventually to the introduction of a new tax system in 1790- 
1791. A land tax was imposed on all landowners and an estate tax on all inher¬ 
ited wealth. In 1797 came what was called the “banqueroute des deux tiers,” 
or “two-thirds bankruptcy,” which was in fact a massive default on two-thirds 
of the outstanding public debt, compounded by high inflation triggered by 
the issuance of assignats (paper money backed by nationalized land). This was 
how the debts of the Ancien Regime were ultimately dealt with. 11 The French 
public debt was thus quickly reduced to a very low level in the first decades of 
the nineteenth century (less than 20 percent of national income in 1815). 


129 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


Britain followed a totally different trajectory. In order to finance its war 
with the American revolutionaries as well as its many wars with France in the 
revolutionary and Napoleonic eras, the British monarchy chose to borrow 
without limit. The public debt consequently rose to too percent of national 
income in the early 1770s and to nearly 200 percent in the 1810s—10 times 
France’s debt in the same period. It would take a century of budget surpluses 
to gradually reduce Britain’s debt to under 30 percent of national income in 
the 1910s (see Figure 3.3). 

What lessons can we draw from this historical experience? First, there is 
no doubt that Britain’s high level of public debt enhanced the influence of 
private wealth in British society. Britons who had the necessary means lent 
what the state demanded without appreciably reducing private investment: 
the very substantial increase in public debt in the period 1770-1810 was fi¬ 
nanced largely by a corresponding increase in private saving (proving that the 
propertied class in Britain was indeed prosperous and that yields on govern¬ 
ment bonds were attractive), so that national capital remained stable overall at 
around seven years of national income throughout the period, whereas pri¬ 
vate wealth rose to more than eight years of national income in the 1810s, as 
net public capital fell into increasingly negative territory (see Figure 3.5). 

Hence it is no surprise that wealth is ubiquitous in Jane Austen’s novels: 
traditional landlords were joined by unprecedented numbers of government 
bondholders. (These were largely the same people, if literary sources count as 
reliable historical sources.) The result was an exceptionally high level of over¬ 
all private wealth. Interest on British government bonds supplemented land 
rents as private capital grew to dimensions never before seen. 

Second, it is also quite clear that, all things considered, this very high level 
of public debt served the interests of the lenders and their descendants quite 
well, at least when compared with what would have happened if the British 
monarchy had financed its expenditures by making them pay taxes. From the 
standpoint of people with the means to lend to the government, it is obviously 
far more advantageous to lend to the state and receive interest on the loan for 
decades than to pay taxes without compensation. Furthermore, the fact that 
the government’s deficits increased the overall demand for private wealth in¬ 
evitably increased the return on that wealth, thereby serving the interests of 
those whose prosperity depended on the return on their investment in gov¬ 
ernment bonds. 


130 


THE METAMORPHOSES OF CAPITAL 


The central fact—and the essential difference from the twentieth 
century—is that the compensation to those who lent to the government was 
quite high in the nineteenth century: inflation was virtually zero from 1815 to 
1914, and the interest rate on government bonds was generally around 4-5 
percent; in particular, it was significantly higher than the growth rate. Under 
such conditions, investing in public debt can be very good business for wealthy 
people and their heirs. 

Concretely, imagine a government that runs deficits on the order of 5 per¬ 
cent of GDP every year for twenty years (to pay, say, the wages of a large num¬ 
ber of soldiers front 1795 to 1815) without having to increase taxes by an 
equivalent amount. After twenty years, an additional public debt of 100 per¬ 
cent of GDP will have been accumulated. Suppose that the government does 
not seek to repay the principal and simply pays the annual interest due on the 
debt. If the interest rate is 5 percent, it will have to pay 5 percent of GDP every 
year to the owners of this additional public debt, and must continue to do so 
until the end of time. 

In broad outline, this is what Britain did in the nineteenth century. For 
an entire century, from 1815 to 1914, the British budget was always in sub¬ 
stantial primary surplus: in other words, tax revenues always exceeded ex¬ 
penditures by several percent of GDP—an amount greater, for example, than 
the total expenditure on education throughout this period. It was only the 
growth of Britain’s domestic product and national income (nearly 2.5 percent 
a year from 1815 to 1914) that ultimately, after a century of penance, allowed 
the British to significantly reduce their public debt as a percentage of na¬ 
tional income. 12 


Who Profits from Public Debt? 

This historical record is fundamental for a number of reasons. First, it enables us 
to understand why nineteenth-century socialists, beginning with Marx, were 
so wary of public debt, which they saw—not without a certain perspicacity—as 
a tool of private capital. 

This concern was all the greater because in those days investors in public 
debt were paid handsomely, not only in Britain but also in many other coun¬ 
tries, including France. There was no repeat of the revolutionary bankruptcy 
of 1797, and the rentiers in Balzac’s novels do not seem to have worried any 


131 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


more about their government bonds than those in Jane Austen’s works. In¬ 
deed, inflation was as low in France as in Britain in the period 1815-1914, and 
interest on government bonds was always paid in a timely manner. French 
sovereign debt was a good investment throughout the nineteenth century, 
and private investors prospered on the proceeds, just as in Britain. Although 
the total outstanding public debt in France was quite limited in 1815, the 
amount grew over the next several decades, particularly during the Restora¬ 
tion and July Monarchy (1815-1848), during which the right to vote was based 
on a property qualification. 

The French government incurred large debts in 1815-1816 to pay for an in¬ 
demnity to the occupying forces and then again in 1825 to finance the notorious 
“emigres’ billion,” a sum paid to aristocrats who fled France during the Revolu¬ 
tion (to compensate them for the ratherlimited redistribution of land that took 
place in their absence). Under the Second Empire, financial interests were well 
served. In the fierce articles that Marx penned in 1849-1850, published in The 
Class Struggle in France, he took offense at the way Louis-Napoleon Bonapar¬ 
te’s new minister of finance, Achille Fould, representing bankers and financiers, 
peremptorily decided to increase the tax on drinks in order to pay rentiers their 
due. Later, after the Franco-Prussian War of 1870-1871, the French government 
once again had to borrow from its population to pay for a transfer of funds to 
Germany equivalent to approximately 30 percent of national income . 13 In the 
end, during the period 1880-1914, the French public debt was even higher than 
the British: 70 to 80 percent of national income compared with less than 50 
percent. In French novels of the Belle Fpoque, interest on government bonds 
figured significantly. The government paid roughly 2-3 percent of national in¬ 
come in interest every year (more than the budget for national education), and a 
very substantial group of people lived on that interest . 14 

In the twentieth century, a totally different view of public debt emerged, 
based on the conviction that debt could serve as an instrument of policy 
aimed at raising public spending and redistributing wealth for the benefit of 
the least well-off members of society. The difference between these two views 
is fairly simple: in the nineteenth century, lenders were handsomely reim¬ 
bursed, thereby increasing private wealth; in the twentieth century, debt was 
drowned by inflation and repaid with money of decreasing value. In practice, 
this allowed deficits to be financed by those who had lent money to the state, 
and taxes did not have to be raised by an equivalent amount. This “progres- 


132 


THE METAMORPHOSES OF CAPITAL 


sive” view of public debt retains its hold on many minds today, even though 
inflation has long since declined to a rate not much above the nineteenth 
century’s, and the distributional effects are relatively obscure. 

It is interesting to recall that redistribution via inflation was much more 
significant in France than in Britain. As noted in Chapter 2, French inflation 
in the period 1913-1950 averaged more than 13 percent a year, which multi¬ 
plied prices by a factor of 100. When Proust published Swanns Way in 1913, 
government bonds seemed as indestructible as the Grand Hotel in Cabourg, 
where the novelist spent his summers. By 1930, the purchasing power of those 
bonds was a hundredth of what it had been, so that the rentiers of 1913 and 
their progeny had virtually nothing left. 

What did this mean to the government? Despite a large initial public debt 
(nearly 80 percent of national income in 1913), and very high deficits in the 
period 1913-1950, especially during the war years, by 1950 French public debt 
once again stood at a relatively low level (about 30 percent of national income), 
just as in 1815. In particular, the enormous deficits of the Liberation were almost 
immediately canceled out by inflation above 50 percent per year in the four years 
1945-1948, in a highly charged political climate. In a sense, this was the equiva¬ 
lent of the “two-thirds bankruptcy” of 1797: past loans were wiped off the books 
in order to rebuild the country with a low level of public debt (see Figure 3.4). 

In Britain, things were done differently: more slowly and with less passion. 
Between 1913 and 1950, the average rate of inflation was a little more than 3 
percent a year, which meant that prices increased by a factor of 3 (less than 
one-thirtieth as much as in France). For British rentiers, this was nevertheless 
a spoliation of a sort that would have been unimaginable in the nineteenth 
century, indeed right up to World War I. Still, it was hardly sufficient to pre¬ 
vent an enormous accumulation of public deficits during two world wars: 
Britain was fully mobilized to pay for the war effort without undue depen¬ 
dence on the printing press, with the result that by 1950 the country found 
itself saddled with a colossal debt, more than 200 percent of GDP, even higher 
than in 1815. Only with the inflation of the 1950s (more than 4 percent a year) 
and above all of the 1970s (nearly 15 percent a year) did Britain’s debt fall to 
around 50 percent of GDP (see Figure 3.3). 

The mechanism of redistribution via inflation is extremely powerful, and 
it played a crucial historical role in both Britain and France in the twentieth 
century. It nevertheless raises two major problems. First, it is relatively crude 


133 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


in its choice of targets: among people with some measure of wealth, those who 
own government bonds (whether directly or indirectly via bank deposits) are 
not always the wealthiest: far from it. Second, the inflation mechanism 
cannot work indefinitely. Once inflation becomes permanent, lenders will 
demand a higher nominal interest rate, and the higher price will not have the 
desired effects. Furthermore, high inflation tends to accelerate constantly, 
and once the process is under way, its consequences can be difficult to master: 
some social groups saw their incomes rise considerably, while others did not. 
It was in the late 1970s—a decade marked by a mix of inflation, rising unem¬ 
ployment, and relative economic stagnation (“stagflation”)—that a new con¬ 
sensus formed around the idea of low inflation. I will return to this issue later. 

The Ups and Downs of Ricardian Equivalence 

This long and tumultuous history of public debt, from the tranquil rentiers of 
the eighteenth and nineteenth centuries to the expropriation by inflation of the 
twentieth century, has indelibly marked collective memories and representa¬ 
tions. The same historical experiences have also left their mark on economists. 
For example, when David Ricardo formulated in 1817 the hypothesis known 
today as “Ricardian equivalence,” according to which, under certain conditions, 
public debt has no effect on the accumulation of national capital, he was obvi¬ 
ously strongly influenced by what he witnessed around him. At the moment he 
wrote, British public debt was close to 100 percent of GDP, yet it seemed not to 
have dried up the flow of private investment or the accumulation of capital. The 
much feared “crowding out” phenomenon had not occurred, and the increase in 
public debt seemed to have been financed by an increase in private saving. To be 
sure, it does not follow from this that Ricardian equivalence is a universal law, 
valid in all times and places. Everything of course depended on the prosperity of 
the social group involved (in Ricardo’s day, a minority of Britons with enough 
wealth to generate the additional savings required), on the rate of interest that 
was offered, and of course on confidence in the government. But it is a fact 
worth noting that Ricardo, who had no access to historical time series or mea¬ 
surements of the type indicated in Figure 3.3 but who had intimate knowledge 
of the British capitalism of his time, clearly recognized that Britain’s gigantic 
public debt had no apparent impact on national wealth and simply constituted 
a claim of one portion of the population on another. 15 


134 


THE METAMORPHOSES OF CAPITAL 


Similarly, when John Maynard Keynes wrote in 1936 about “the euthana¬ 
sia of the rentier,” he was also deeply impressed by what he observed around 
him: the pre-World War I world of the rentier was collapsing, and there was 
in fact no other politically acceptable way out of the economic and budgetary 
crisis of the day. In particular, Keynes clearly felt that inflation, which the 
British were still reluctant to accept because of strong conservative attach¬ 
ment to the pre-1914 gold standard, would be the simplest though not neces¬ 
sarily the most just way to reduce the burden of public debt and the influence 
of accumulated wealth. 

Since the 1970s, analyses of the public debt have suffered from the fact 
that economists have probably relied too much on so-called representative 
agent models, that is, models in which each agent is assumed to earn the same 
income and to be endowed with the same amount of wealth (and thus to own 
the same quantity of government bonds). Such a simplification of reality can 
be useful at times in order to isolate logical relations that are difficult to ana¬ 
lyze in more complex models. Yet by totally avoiding the issue of inequality in 
the distribution of wealth and income, these models often lead to extreme 
and unrealistic conclusions and are therefore a source of confusion rather 
than clarity. In the case of public debt, representative agent models can lead to 
the conclusion that government debt is completely neutral, in regard not only 
to the total amount of national capital but also to the distribution of the fiscal 
burden. This radical reinterpretation of Ricardian equivalence, which was 
first proposed by the American economist Robert Barro, 16 fails to take ac¬ 
count of the fact that the bulk of the public debt is in practice owned by a 
minority of the population (as in nineteenth-century Britain but not only 
there), so that the debt is the vehicle of important internal redistributions when 
it is repaid as well as when it is not. In view of the high degree of concentration 
that has always been characteristic of the wealth distribution, to study these 
questions without asking about inequalities between social groups is in fact to 
say nothing about significant aspects of the subject and what is really at stake. 

France: A Capitalism without Capitalists in the Postwar Period 

I return now to the history of public wealth and to the question of assets held 
by the government. Compared with the history of government debt, the his¬ 
tory of public assets is seemingly less tumultuous. 


135 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


To simplify, one can say that the total value of public assets increased over 
the long run in both France and Britain, rising from barely 50 percent of national 
income in the eighteenth and nineteenth centuries to roughly too percent at 
the end of the twentieth century (see Figures 3.3 and 3.4). 

To a first approximation, this increase reflects the steady expansion of the 
economic role of the state over the course of history, including in particular the 
development of ever more extensive public services in the areas of health and 
education (necessitating major investments in buildings and equipment) to¬ 
gether with public or semipublic infrastructural investments in transportation 
and communication. These public services and infrastructures are more exten¬ 
sive in France than in Britain: the total value of public assets in France in 2010 
is close to 150 percent of national income, compared with barely too percent 
across the Channel. 

Nevertheless, this simplified, tranquil view of the accumulation of public 
assets over the long run omits an important aspect of the history of the last 
century: the accumulation of significant public assets in the industrial and 
financial sectors in the period 1950-1980, followed by major waves of privati¬ 
zation of the same assets after 1980. Both phenomena can be observed to vary¬ 
ing degrees in most developed countries, especially in Europe, as well as in 
many emerging economies. 

The case of France is emblematic. To understand it, we can look back in 
time. Not only in France but in countries around the world, faith in private 
capitalism was greatly shaken by the economic crisis of the 1930s and the cata¬ 
clysms that followed. The Great Depression, triggered by the Wall Street crash 
of October 1929, struck the wealthy countries with a violence that has never 
been repeated to this day: a quarter of the working population in the United 
States, Germany, Britain, and France found themselves out of work. The tradi¬ 
tional doctrine of “laissez faire,” or nonintervention by the state in the econ¬ 
omy, to which all countries adhered in the nineteenth century and to a large 
extent until the early 1930s, was durably discredited. Many countries opted for 
a greater degree of interventionism. Naturally enough, governments and the 
general public questioned the wisdom of financial and economic elites who 
had enriched themselves while leading the world to disaster. People began to 
think about different types of “mixed” economy, involving varying degrees of 
public ownership of firms alongside traditional forms of private property, or 


136 


THE METAMORPHOSES OF CAPITAL 


else, at the very least, a strong dose of public regulation and supervision of the 
financial system and of private capitalism more generally. 

Furthermore, the fact that the Soviet Union joined the victorious Allies 
in World War II enhanced the prestige of the statist economic system the 
Bolsheviks had put in place. Had not that system allowed the Soviets to lead 
a notoriously backward country, which in 1917 had only just emerged from 
serfdom, on a forced march to industrialization? In 1941, Joseph Schumpeter 
believed that socialism would inevitably triumph over capitalism. In 1970, 
when Paul Samuelson published the eighth edition of his famous textbook, 
he was still predicting that the GDP of the Soviet Union might outstrip that 
of the United States sometime between 1990 and 2000. 17 

In France, this general climate of distrust toward private capitalism was 
deepened after 1945 by the fact that many members of the economic elite were 
suspected of having collaborated with the German occupiers and indecently 
enriched themselves during the war. It was in this highly charged post- 
Liberation climate that major sectors of the economy were nationalized, in¬ 
cluding in particular the banking sector, the coal mines, and the automobile 
industry. The Renault factories were punitively seized after their owner, Louis 
Renault, was arrested as a collaborator in September 1944. The provisional 
government nationalized the firm in January 1945. 18 

In 1950, according to available estimates, the total value of French public 
assets exceeded one year’s national income. Since the value of public debt had 
been sharply reduced by inflation, net public wealth was close to one year’s 
national income, at a time when total private wealth was worth barely two 
years of national income (see Figure 3 . 6 ). As usual, one should not be misled 
by the apparent precision of these estimates: it is difficult to measure the value 
of capital in this period, when asset prices had attained historic lows, and it is 
possible that public assets are slightly undervalued compared with private as¬ 
sets. But the orders of magnitude may be taken as significant: in 1950, the 
government of France owned 25-30 percent of the nation’s wealth, and per¬ 
haps even a little more. 

This is a significant proportion, especially in view of the fact that public 
ownership left small and medium firms untouched, along with agriculture, 
and never claimed more than a minority share (less than 20 percent) of resi¬ 
dential real estate. In the industrial and financial sectors most directly af- 


137 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


fected by the postwar nationalizations, the state’s share of national wealth 
exceeded 50 percent from 1950 to 1980. 

Although this historical episode was relatively brief, it is important for 
understanding the complex attitude of the French people toward private capi¬ 
talism even today. Throughout the Trente Glorieuses, during which the coun¬ 
try was rebuilt and economic growth was strong (stronger that at any other 
time in the nation’s history), France had a mixed economy, in a sense a capital¬ 
ism without capitalists, or at any rate a state capitalism in which private own¬ 
ers no longer controlled the largest firms. 

To be sure, waves of nationalization also occurred in this same period in 
many other countries, including Britain, where the value of public assets also 
exceeded a year’s national income in 1950—a level equal to that of France. The 
difference is that British public debt at the time exceeded two years of na¬ 
tional income, so that net public wealth was significantly negative in the 
1950s, and private wealth was that much greater. Net public wealth did not 
turn positive in Britain until the 1960S-1970S, and even then it remained less 
than lo percent of national income (which is already quite large ). 19 

What is distinctive about the French trajectory is that public ownership, 
having thrived from 1950 to 1980, dropped to very low levels after 1980, even 
as private wealth—both financial and real estate—rose to levels even higher 
than Britain’s: nearly six years of national income in 2010, or 20 times the 
value of public wealth. Following a period of state capitalism after 1950, France 
became the promised land of the new private-ownership capitalism of the 
twenty-first century. 

What makes the change all the more striking is that it was never clearly 
acknowledged for what it was. The privatization of the economy, including 
both liberalization of the market for goods and services and deregulation 
of financial markets and capital flows, which affected countries around the 
world in the 1980s, had multiple and complex origins. The memory of the 
Great Depression and subsequent disasters had faded. The “stagflation” of the 
1970s demonstrated the limits of the postwar Keynesian consensus. With 
the end of postwar reconstruction and the high growth rates of the Trente 
Glorieuses, it was only natural to question the wisdom of indefinitely expand¬ 
ing the role of the state and its increasing claims on national output. The de¬ 
regulation movement began with the “conservative revolutions” of 1979-1980 
in the United States and Britain, as both countries increasingly chafed at be- 


138 


THE METAMORPHOSES OF CAPITAL 


ing overtaken by others (even though the catch-up was a largely inevitable 
process, as noted in Chapter 2). Meanwhile, the increasingly obvious failure 
of statist Soviet and Chinese models in the 1970s led both communist giants 
to begin a gradual liberalization of their economic systems in the 1980s by 
introducing new forms of private property in firms. 

Despite these converging international currents, French voters in 1981 dis¬ 
played a certain desire to sail against the wind. Every country has its own his¬ 
tory, of course, and its own political timetable. In France, a coalition of So¬ 
cialists and Communists won a majority on a platform that promised to 
continue the nationalization of the industrial and banking sectors begun in 
1945. This proved to be a brief intermezzo, however, since in 1986 a liberal 
majority initiated a very important wave of privatization in all sectors. This 
initiative was then continued and amplified by a new socialist majority in the 
period 1988-1993. The Renault Company became a joint-stock corporation in 
1990, as did the public telecommunications administration, which was trans¬ 
formed into France Telecom and opened to private investment in 1997-1998. 
In a context of slower growth, high unemployment, and large government 
deficits, the progressive sale of publicly held shares after 1990 brought addi¬ 
tional funds into public coffers, although it did not prevent a steady increase 
in the public debt. Net public wealth fell to very low levels. Meanwhile, pri¬ 
vate wealth slowly returned to levels not seen since the shocks of the twenti¬ 
eth century. In this way, France totally transformed its national capital struc¬ 
ture at two different points in time without really understanding why. 


139 


{ FOUR } 


From Old Europe to the New World 


In the previous chapter, I examined the metamorphoses of capital in Britain 
and France since the eighteenth century. The lessons to be learned from each 
country proved consistent and complementary. The nature of capital was to¬ 
tally transformed, but in the end its total amount relative to income scarcely 
changed at all. To gain a better understanding of the different historical pro¬ 
cesses and mechanisms involved, the analysis must now extend to other coun¬ 
tries. I will begin by looking at Germany, which will round out the European 
panorama. Then I will turn my attention to capital in North America (the 
United States and Canada). Capital in the New World took some quite un¬ 
usual and specific forms, in the first place because land was so abundant that 
it did not cost very much; second, because of the existence of slavery; and fi¬ 
nally, because this region of perpetual demographic growth tended to accu¬ 
mulate structurally smaller amounts of capital (relative to annual income and 
output) than Europe did. This will lead to the question of what fundamen¬ 
tally determines the capital/income ratio in the long run, which will be the 
subject of Chapter 5 .1 will approach that question by extending the analysis 
first to all the wealthy countries and then to the entire globe, insofar as the 
sources allow. 

Germany: Rhenish Capitalism and Social Oivnership 

I begin with the case of Germany. It is interesting to compare the British and 
French trajectories with the German, especially in regard to the issue of mixed 
economy, which became important, as noted, after World War II. Unfortu¬ 
nately, the historical data for Germany are more diverse, owing to the lateness 
of German unification and numerous territorial changes, so there is no satis¬ 
factory way to trace the history back beyond 1870. Still, the estimates we have 
for the period after 1870 reveal clear similarities with Britain and France, as 
well as a number of differences. 


140 


Value of national capital (% national income) 


FROM OLD EUROPE TO THE NEW WORLD 



FIGURE 4.1. Capital in Germany, 1870-2010 

National capital is worth 6.5 years of national income in Germany in 1910 (including 
about 0.5 year invested abroad). 

Sources and series: see piketty.pse.ens.fr/capital21c. 


The first thing to notice is that the overall evolution is similar: first, agri¬ 
cultural land gave way in the long run to residential and commercial real es¬ 
tate and industrial and financial capital, and second, the capital/income ratio 
has grown steadily since World War II and appears to be on its way to regain¬ 
ing the level it had attained prior to the shocks of 1914-1945 (see Figure 4.1). 

Note that the importance of farmland in late nineteenth-century Ger¬ 
many made the German case resemble the French more than the British one 
(agriculture had not yet disappeared east of the Rhine), and the value of in¬ 
dustrial capital was higher than in either France or Britain. By contrast, Ger¬ 
many on the eve of World War I had only half as much in foreign assets as 
France (roughly 50 percent of national income versus a year’s worth of income 
for France) and only a quarter as much as Britain (whose foreign assets were 
worth two years of national income). The main reason for this is of course 
that Germany had no colonial empire, a fact that was the source of some very 
powerful political and military tensions: think, for example, of the Moroccan 
crises of 1905 and 1911, when the Kaiser sought to challenge French supremacy 


141 























THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


in Morocco. The heightened competition among European powers for colonial 
assets obviously contributed to the climate that ultimately led to the declaration 
of war in the summer of 1914: one need not subscribe to all of Lenin’s theses in 
Imperialism, the Highest Stage of Capitalism (1916) to share this conclusion. 

Note, too, that Germany over the past several decades has amassed sub¬ 
stantial foreign assets thanks to trade surpluses. By 2010, Germany’s net for¬ 
eign asset position was close to 50 percent of national income (more than half 
of which has been accumulated since 2000). This is almost the same level as in 
1913. It is a small amount compared to the foreign asset positions of Britain 
and France at the end of the nineteenth century, but it is substantial com¬ 
pared to the current positions of the two former colonial powers, which are 
close to zero. A comparison of Figure 4.1 with Figures 3.1-2 shows how differ¬ 
ent the trajectories of Germany, France, and Britain have been since the nine¬ 
teenth century: to a certain extent they have inverted their respective posi¬ 
tions. In view of Germany’s very large current trade surpluses, it is not 
impossible that this divergence will increase. I will come back to this point. 

In regard to public debt and the split between public and private capital, 
the German trajectory is fairly similar to the French. With average inflation 
of nearly 17 percent between 1930 and 1930, which means that prices were 
multiplied by a factor of 300 between those dates (compared with barely too 
in France), Germany was the country that, more than any other, drowned its 
public debt in inflation in the twentieth century. Despite running large defi¬ 
cits during both world wars (the public debt briefly exceeded 100 percent of 
GDP in 1918-1920 and 150 percent of GDP in 1943-1944), inflation made it 
possible in both instances to shrink the debt very rapidly to very low levels: 
barely 20 percent of GDP in 1930 and again in 1950 (see Figure 4.2). 1 Yet the 
recourse to inflation was so extreme and so violently destabilized German 
society and economy, especially during the hyperinflation of the 1920s, that 
the German public came away from these experiences with a strongly antiin¬ 
flationist attitude . 2 That is why the following paradoxical situation exists to¬ 
day: Germany, the country that made the most dramatic use of inflation to 
rid itself of debt in the twentieth century, refuses to countenance any rise in 
prices greater than 2 percent a year, whereas Britain, whose government has 
always paid its debts, even more than was reasonable, has a more flexible atti¬ 
tude and sees nothing wrong with allowing its central bank to buy a substan¬ 
tial portion of its public debt even if it means slightly higher inflation. 


142 


Public assets and debt (% national income) 


FROM OLD EUROPE TO THE NEW WORLD 



FIGURE 4.2. Public wealth in Germany, 1870-2010 

Public debt is worth almost one year of national income in Germany in 2010 (as much 
as assets). 

Sources and series: see piketty.pse.ens.fr/capital21c. 


In regard to the accumulation of public assets, the German case is again 
similar to the French: the government took large positions in the banking 
and industrial sectors in the period 1950-1980, then partially sold off those 
positions between 1980 and 2000, but substantial holdings remain. For ex¬ 
ample, the state of Lower Saxony today owns more than 15 percent of the 
shares (and 20 percent of the voting rights, which are guaranteed by law, de¬ 
spite objections front the European Union) of Volkswagen, the leading auto¬ 
mobile manufacturer in Europe and the world. 3 In the period 1950-1980, 
when public debt was close to zero, net public capital was close to one year’s 
national income in Germany, compared with barely two years for private 
capital, which then stood at a very low level (see Figure 4.3). Just as in France, 
the government owned 25-30 percent of Germany’s national capital during 
the decades of postwar reconstruction and the German economic miracle. 
Just as in France, the slowdown in economic growth after 1970 and the accumu¬ 
lation of public debt (which began well before reunification and has continued 
since) led to a complete turnaround over the course of the past few decades. Net 
public wealth was almost exactly zero in 2010, and private wealth, which has 
grown steadily since 1950, accounts for nearly all of national wealth. 


143 


























National, private, and public capital 
(% national income) 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 



FIGURE 4.3. Private and public capital in Germany, 1870-2010 

In 1970, public capital is worth almost one year of national income, versus slightly 
more than two for private capital. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


There is, however, a significant difference between the value of private 
capital in Germany compared to that in France and Britain. German private 
wealth has increased enormously since World War II: it was exceptionally low 
in 1950 (barely a year and a half of national income), but today it stands at 
more than four years of national income. The reconstitution of private wealth 
in all three countries emerges clearly from Figure 4.4. Nevertheless, German 
private wealth in 2010 was noticeably lower than private wealth in Britain 
and France: barely four years of national income in Germany compared with 
five or six in France and Britain and more than six in Italy and Spain (as we 
will see in Chapter 5). Given the high level of German saving, this low level of 
German wealth compared to other European countries is to some extent a 
paradox, which may be transitory and can be explained as follows. 4 

The first factor to consider is the low price of real estate in Germany compared 
to other European countries, which can be explained in part by the fact that the 
sharp price increases seen everywhere else after 1990 were checked in Germany 
by the effects of German reunification, which brought a large number of low- 
cost houses onto the market. To explain the discrepancy over the long term, 
however, we would need more durable factors, such as stricter rent control. 


144 



























FROM OLD EUROPE TO THE NEW WORLD 



figure 4.4. Private and public capital in Europe, 1870-2010 

The fluctuations of national capital in Europe in the long run are mostly due to the 
fluctuations of private capital. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


In any case, most of the gap between Germany on the one hand and 
France and Britain on the other stems not from the difference in the value of 
the housing stock but rather front the difference in the value of other domes¬ 
tic capital, and primarily the capital of firms (see Figure 4.1). In other words, 
the gap arises not from the low valuation of German real estate but rather 
from the low stock market valuation of German firms. If, in measuring total 
private wealth, we used not stock market value but book value (obtained by 
subtracting a firm’s debt from the cumulative value of its investments), the 
German paradox would disappear: German private wealth would immedi¬ 
ately rise to French and British levels (between five and six years of national 
income rather than four). These complications may appear to be purely mat¬ 
ters of accounting but are in fact highly political. 

At this stage, suffice it to say that the lower market values of German firms 
appear to reflect the character of what is sometimes called “Rhenish capitalism” 
or “the stakeholder model,” that is, an economic model in which firms are owned 
not only by shareholders but also by certain other interested parties known as 
“stakeholders,” starting with representatives of the firms’ workers (who sit on the 
boards of directors of German firms not merely in a consultative capacity but as 


145 













































THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


active participants in deliberations, even though they may not be shareholders), 
as well as representatives of regional governments, consumers’ associations, en¬ 
vironmental groups, and so on. The point here is not to idealize this model of 
shared social ownership, which has its limits, but simply to note that it can be at 
least as efficient economically as Anglo-Saxon market capitalism or “the share¬ 
holder model” (in which all power lies in theory with shareholders, although in 
practice things are always more complex), and especially to observe that the 
stakeholder model inevitably implies a lower market valuation but not necessar¬ 
ily a lower social valuation. The debate about different varieties of capitalism 
erupted in the early 1990s after the collapse of the Soviet Union . 5 Its intensity 
later waned, in part no doubt because the German economic model seemed to 
be losing steam in the years after reunification (between 1998 and 2.002., Ger¬ 
many was often presented as the sick man of Europe). In view of Germany’s 
relatively good health in the midst of the global financial crisis (2007-2012), it 
is not out of the question that this debate will be revived in the years to come . 6 

Shocks to Capital in the Twentieth Century 

Now that I have presented a first look at the general evolution of the capital/ 
income ratio and the public-private split over the long run, I must return to 
the question of chronology and in particular attempt to understand the rea¬ 
sons first for the collapse of the capital/income ratio over the course of the 
twentieth century and then for its spectacular recovery. 

Note first of all that this was a phenomenon that affected all European 
countries. All available sources indicate that the changes observed in Britain, 
France, and Germany (which together in 1910 and again in 2010 account for 
more than two-thirds of the GDP of Western Europe and more than half of 
the GDP of all of Europe) are representative of the entire continent: although 
interesting variations between countries do exist, the overall pattern is the 
same. In particular, the capital/income ratio in Italy and Spain has risen quite 
sharply since 1970, even more sharply than in Britain and France, and the 
available historical data suggest that it was on the order of six or seven years of 
national income around the turn of the twentieth century. Available estimates 
for Belgium, the Netherlands, and Austria indicate a similar pattern. 7 

Next, we must insist on the fact that the fall in the capital/income ratio 
between 1914 and 1945 is explained to only a limited extent by the physical 


146 


Public and private capital 
(% national income) 


FROM OLD EUROPE TO THE NEW WORLD 



FIGURE 4.5. National capital in Europe, 1870-2010 

National capital (sum of public and private capital) is worth between two and three 
years of national income in Europe in 1950. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


destruction of capital (buildings, factories, infrastructure, etc.) due to the two 
world wars. In Britain, France, and Germany, the value of national capital was 
between six and a half and seven years of national income in 1913 and fell to 
around two and a half years in 1930: a spectacular drop of more than four 
years of national income (see Figures 4.4 and 4.5). To be sure, there was sub¬ 
stantial physical destruction of capital, especially in France during World 
War I (during which the northeastern part of the country, on the front lines, 
was severely battered) and in both France and Germany during World War II 
owing to massive bombing in 1944-1945 (although the periods of combat 
were shorter than in World War I, the technology was considerably more de¬ 
structive). All in all, capital worth nearly a year of national income was de¬ 
stroyed in France (accounting for one-fifth to one-quarter of the total decline 
in the capital/income ratio), and a year and a half in Germany (or roughly a 
third of the total decline). Although these losses were quite significant, they 
clearly explain only a fraction of the total drop, even in the two countries 
most directly affected by the conflicts. In Britain, physical destruction was 
less extensive—insignificant in World War I and less than 10 percent of na¬ 
tional income owing to German bombing in World War II—yet national 


147 

































THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


capital fell by four years of national income (or more than 40 times the loss 
due to physical destruction), as much as in France and Germany. 

In fact, the budgetary and political shocks of two wars proved far more 
destructive to capital than combat itself. In addition to physical destruction, 
the main factors that explain the dizzying fall in the capital/income ratio be¬ 
tween 1913 and 1950 were on the one hand the collapse of foreign portfolios 
and the very low savings rate characteristic of the time (together, these two 
factors, plus physical destruction, explain two-thirds to three-quarters of the 
drop) and on the other the low asset prices that obtained in the new postwar 
political context of mixed ownership and regulation (which accounted for 
one-quarter to one-third of the drop). 

I have already mentioned the importance of losses on foreign assets, espe¬ 
cially in Britain, where net foreign capital dropped from two years of national 
income on the eve of World War I to a slightly negative level in the 1950s. 
Britain’s losses on its international portfolio were thus considerably greater 
than French or German losses through physical destruction of domestic capi¬ 
tal, and these more than made up for the relatively low level of physical de¬ 
struction on British soil. 

The decline of foreign capital stemmed in part from expropriations due to 
revolution and the process of decolonization (think of the Russian loans to 
which many French savers subscribed in the Belle Fpoque and that the Bol¬ 
sheviks repudiated in 1917, or the nationalization of the Suez Canal by Nasser 
in 1956, to the dismay of the British and French shareholders who owned the 
canal and had been collecting dividends and royalties on it since 1869) and in 
even greater part to the very low savings rate observed in various European 
countries between 1914 and 1945, which led British and French (and to a lesser 
degree German) savers to gradually sell off their foreign assets. Owing to low 
growth and repeated recessions, the period 1914-1945 was a dark one for all 
Europeans but especially for the wealthy, whose income dwindled consider¬ 
ably in comparison with the Belle Epoque. Private savings rates were there¬ 
fore relatively low (especially if we deduct the amount of reparations and re¬ 
placement of war-damaged property), and some people consequently chose to 
maintain their standard of living by gradually selling off part of their capital. 
When the Depression came in the 1930s, moreover, many stock- and bond¬ 
holders were ruined as firm after firm went bankrupt. 


148 


FROM OLD EUROPE TO THE NEW WORLD 


Furthermore, the limited amount of private saving was largely absorbed 
by enormous public deficits, especially during the wars: national saving, the 
sum of private and public saving, was extremely low in Britain, France, and 
Germany between 1914 and 1945. Savers lent massively to their governments, 
in some cases selling their foreign assets, only to be ultimately expropriated by 
inflation, very quickly in France and Germany and more slowly in Britain, 
which created the illusion that private wealth in Britain was faring better in 
1950 than private wealth on the continent. In fact, national wealth was equally 
affected in both places (see Figures 4.4 and 4.5). At times governments bor¬ 
rowed directly from abroad: that is how the United States went from a nega¬ 
tive position on the eve of World War I to a positive position in the 1950s. But 
the effect on the national wealth of Britain or France was the same. 8 

Ultimately, the decline in the capital/income ratio between 1913 and 1950 
is the history of Europe’s suicide, and in particular of the euthanasia of Euro¬ 
pean capitalists. 

This political, military, and budgetary history would be woefully incom¬ 
plete, however, if we did not insist on the fact that the low level of the capital/ 
income ratio after World War II was in some ways a positive thing, in that it 
reflected in part a deliberate policy choice aimed at reducing—more or less 
consciously and more or less efficaciously—the market value of assets and the 
economic power of their owners. Concretely, real estate values and stocks fell 
to historically low levels in the 1950s and 1960s relative to the price of goods 
and services, and this goes some way toward explaining the low capital/income 
ratio. Remember that all forms of wealth are evaluated in terms of market prices 
at a given point in time. This introduces an element of arbitrariness (markets 
are often capricious), but it is the only method we have for calculating the na¬ 
tional capital stock: how else could one possibly add up hectares of farmland, 
square meters of real estate, and blast furnaces? 

In the postwar period, housing prices stood at historic lows, owing pri¬ 
marily to rent control policies that were adopted nearly everywhere in periods 
of high inflation such as the early 1920s and especially the 1940s. Rents rose 
less sharply than other prices. Housing became less expensive for tenants, while 
landlords earned less on their properties, so real estate prices fell. Similarly, the 
value of firms, that is, the value of the stock of listed firms and shares of part¬ 
nerships, fell to relatively low levels in the 1950s and 1960s. Not only had 


149 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


confidence in the stock markets been strongly shaken by the Depression and 
the nationalizations of the postwar period, but new policies of financial regu¬ 
lation and taxation of dividends and profits had been established, helping to 
reduce the power of stockholders and the value of their shares. 

Detailed estimates for Britain, France, and Germany show that low real es¬ 
tate and stock prices after World War II account for a nonnegligible but still mi¬ 
nority share of the fall in the capital/income ratio between 1913 and 1950: be¬ 
tween one-quarter and one-third of the drop depending on the country, whereas 
volume effects (low national savings rate, loss of foreign assets, destructions) ac¬ 
count for two-thirds to three-quarters of the decline. 9 Similarly, as I will show in 
the next chapter, the very strong rebound of real estate and stock market prices in 
the 1970s and 1980s and especially the 1990s and 2.000s explains a significant 
part of the rebound in the capital/income ratio, though still less important than 
volume effects, linked this time to a structural decrease in the rate of growth. 

Capital in America: More Stable Than in Europe 

Before studying in greater detail the rebound in the capital/income ratio in 
the second half of the twentieth century and analyzing the prospects for the 
twenty-first century, I now want to move beyond the European framework to 
examine the historical forms and levels of capital in America. 

Several facts stand out clearly. First, America was the New World, where 
capital mattered less than in the Old World, meaning old Europe. More pre¬ 
cisely, the value of the stock of national capital, based on numerous contem¬ 
porary estimates I have collected and compared, as for other countries, was 
scarcely more than three years of national income around the time that the 
United States gained its independence, in the period 1770-1810. Farmland 
was valued at between one and one and a half years of national income (see 
Figure 4.6). Uncertainties notwithstanding, there is no doubt that the capital/ 
income ratio was much lower in the New World colonies than in Britain or 
France, where national capital was worth roughly seven years of national in¬ 
come, of which farmland accounted for nearly four (see Figures 3.1 and 3.2). 

The crucial point is that the number of hectares per person was obviously 
far greater in North America than in old Europe. In volume, capital per cap¬ 
ita was therefore higher in the United States. Indeed, there was so much land 
that its market value was very low: anyone could own vast quantities, and 


150 


Value of national capital (% national income) 


FROM OLD EUROPE TO THE NEW WORLD 



figure 4 . 6 . Capital in the United States, 1770-2010 

National capital is worth three years of national income in the United States in 1770 
(including 1.5 years in agricultural land). 

Sources and series: see piketty.pse.ens.fr/capital21c. 


therefore it was not worth very much. In other words, the price effect more 
than counterbalanced the volume effect: when the volume of a given type of 
capital exceeds certain thresholds, its price will inevitably fall to a level so low 
that the product of the price and volume, which is the value of the capital, is 
lower than it would be if the volume were smaller. 

The considerable difference between the price of land in the New World 
and in Europe at the end of the eighteenth century and the beginning of the 
nineteenth is confirmed by all available sources concerning land purchases 
and inheritances (such as probate records and wills). 

Furthermore, the other types of capital—housing and other domestic 
capital—were also relatively less important in the colonial era and during the 
early years of the American republic (in comparison to Europe). The reason for 
this is different, but the fact is not surprising. New arrivals, who accounted for a 
very large proportion of the US population, did not cross the Atlantic with their 
capital of homes or tools or machinery, and it took time to accumulate the 
equivalent of several years of national income in real estate and business capital. 


151 


























THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


Make no mistake: the low capital/income ratio in America reflected a 
fundamental difference in the structure of social inequalities compared with 
Europe. The fact that total wealth amounted to barely three years of national 
income in the United States compared with more than seven in Europe signi¬ 
fied in a very concrete way that the influence of landlords and accumulated 
wealth was less important in the New World. With a few years of work, the 
new arrivals were able to close the initial gap between themselves and their 
wealthier predecessors—or at any rate it was possible to close the wealth gap 
more rapidly than in Europe. 

In 1840, Tocqueville noted quite accurately that “the number of large for¬ 
tunes [in the United States] is quite small, and capital is still scarce,” and he 
saw this as one obvious reason for the democratic spirit that in his view domi¬ 
nated there. He added that, as his observations showed, all of this was a con¬ 
sequence of the low price of agricultural land: “In America, land costs little, 
and anyone can easily become a landowner.” 10 Here we can see at work the 
Jeffersonian ideal of a society of small landowners, free and equal. 

Things would change over the course of the nineteenth century. The share 
of agriculture in output decreased steadily, and the value of farmland also de¬ 
clined, as in Europe. But the United States accumulated a considerable stock 
of real estate and industrial capital, so that national capital was close to five 
years of national income in 1910, versus three in 1810. The gap with old Europe 
remained, but it had shrunk by half in one century (see Figure 4.6). The United 
States had become capitalist, but wealth continued to have less influence than 
in Belle Epoque Europe, at least if we consider the vast US territory as a whole. 
If we limit our gaze to the East Coast, the gap is smaller still. In the film Titanic, 
the director, James Cameron, depicted the social structure of 1912. He chose to 
make wealthy Americans appear just as prosperous—and arrogant—as their 
European counterparts: for instance, the detestable Hockley, who wants to 
bring young Rose to Philadelphia in order to marry her. (Heroically, she refuses 
to be treated as property and becomes Rose Dawson.) The novels of Henry 
James that are set in Boston and New York between 1880 and 1910 also show 
social groups in which real estate and industrial and financial capital matter al¬ 
most as much as in European novels: times had indeed changed since the Revo¬ 
lutionary War, when the United States was still a land without capital. 

The shocks of the twentieth century struck America with far less violence 
than Europe, so that the capital/income ratio remained far more stable: it os- 


152 


Public assets and debt (% national income) 


FROM OLD EUROPE TO THE NEW WORLD 



figure 4.7. Public wealth in the United States, 1770-2010 

Public debt is worth one year of national income in the United States in 1950 (almost 
as much as assets). 

Sources and series: see piketty.pse.ens.fr/capital21c. 


ciliated between four and five years of national income from 1910 to 2010 (see 
Figure 4.6), whereas in Europe it dropped from more than seven years to less 
than three before rebounding to five or six (see Figures 3.1-2). 

To be sure, US fortunes were also buffeted by the crises of 1914-1945. Pub¬ 
lic debt rose sharply in the United States due to the cost of waging war, espe¬ 
cially during World War II, and this affected national saving in a period of 
economic instability: the euphoria of the 1920s gave way to the Depression of 
the 1930s. (Cameron tells us that the odious Hockley commits suicide in Oc¬ 
tober 1929.). Under Franklin D. Roosevelt, moreover, the United States ad¬ 
opted policies designed to reduce the influence of private capital, such as rent 
control, just as in Europe. After World War II, real estate and stock prices 
stood at historic lows. When it came to progressive taxation, the United States 
went much farther than Europe, possibly demonstrating that the goal there 
was more to reduce inequality than to eradicate private property. No sweep¬ 
ing policy of nationalization was attempted, although major public investments 
were initiated in the 1930s and 1940s, especially in infrastructures. Inflation 
and growth eventually returned public debt to a modest level in the 1950s and 
1960s, so that public wealth was distinctly positive in 1970 (see Figure 4.7). In 


153 



























National, private, and public capital 
(% national income) 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 



figure 4.8. Private and public capital in the United States, 1770-2010 

In 2010, public capital is worth 20 percent of national income, versus over 400 percent 
for private capital. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


the end, American private wealth decreased from nearly five years of national 
income in 1930 to less than three and a half in 1970, a not insignificant decline 
(see Figure 4.8). 

Nevertheless, the “U-shaped curve” of the capital/income ratio in the twen¬ 
tieth century is smaller in amplitude in the United States than in Europe. 
Expressed in years of income or output, capital in the United States seems to 
have achieved virtual stability from the turn of the twentieth century on—so 
much so that a stable capital/income or capital/output ratio is sometimes 
treated as a universal law in US textbooks (like Paul Samuelson’s). In com¬ 
parison, Europe’s relation to capital, and especially private capital, was nota¬ 
bly chaotic in the century just past. In the Belle Epoque capital was king. In 
the years after World War II many people thought capitalism had been al¬ 
most eradicated. Yet at the beginning of the twenty-first century Europe 
seems to be in the avant-garde of the new patrimonial capitalism, with private 
fortunes once again surpassing US levels. This is fairly well explained by the 
lower rate of economic and especially demographic growth in Europe compared 
with the United States, leading automatically to increased influence of wealth 
accumulated in the past, as we will see in Chapter 5. In any case, the key fact 


154 



































FROM OLD EUROPE TO THE NEW WORLD 


is that the United States enjoyed a much more stable capital/income ratio 
than Europe in the twentieth century, perhaps explaining why Americans 
seem to take a more benign view of capitalism than Europeans. 

The New World and Foreign Capital 

Another key difference between the history of capital in America and Europe 
is that foreign capital never had more than a relatively limited importance in 
the United States. This is because the United States, the first colonized terri¬ 
tory to have achieved independence, never became a colonial power itself. 

Throughout the nineteenth century, the United States’ net foreign capital 
position was slightly negative: what US citizens owned in the rest of the world 
was less than what foreigners, mainly British, owned in the United States. 
The difference was quite small, however, at most 10-20 percent of the US na¬ 
tional income, and generally less than 10 percent between 1770 and 1920. 

For example, on the eve of World War I, US domestic capital—farmland, 
housing, other domestic capital—stood at 500 percent of national income. Of 
this total, the assets owned by foreign investors (minus foreign assets held by 
US investors) represented the equivalent of 10 percent of national income. 
The national capital, or net national wealth, of the United States was thus 
about 490 percent of national income. In other words, the United States was 
98 percent US-owned and 2 percent foreign-owned. The net foreign asset po¬ 
sition was close to balanced, especially when compared to the enormous for¬ 
eign assets held by Europeans: between one and two years of national income 
in France and Britain and half a year in Germany. Since the GDP of the 
United States was barely more than half of the GDP of Western Europe in 
1913, this also means that the Europeans of 1913 held only a small proportion 
of their foreign asset portfolios (less than 5 percent) in the United States. To 
sum up, the world of 1913 was one in which Europe owned a large part of Af¬ 
rica, Asia, and Latin America, while the United States owned itself. 

With the two world wars, the net foreign asset position of the United States 
reversed itself: it was negative in 1913 but turned slightly positive in the 1920s and 
remained so into the 1970s and 1980s. The United States financed the belliger¬ 
ents and thus ceased to be a debtor of Europe and became a creditor. It bears 
emphasizing, however, that the United States’ net foreign assets holdings re¬ 
mained relatively modest: barely 10 percent of national income (see Figure 4.6). 


155 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


In the 1950s and 1960s in particular, the net foreign capital held by the 
United States was still fairly limited (barely 5 percent of national income, 
whereas domestic capital was close to 400 percent, or 80 times greater). The 
investments of US multinational corporations in Europe and the rest of the 
world attained levels that seemed considerable at the time, especially to Euro¬ 
peans, who were accustomed to owning the world and who chafed at the idea 
of owing their reconstruction in part to Uncle Sam and the Marshall Plan. In 
fact, despite these national traumas, US investments in Europe would always 
be fairly limited compared to the investments the former colonial powers had 
held around the globe a few decades earlier. Furthermore, US investments in 
Europe and elsewhere were balanced by continued strong foreign investment 
in the United States, particularly by Britain. In the series Mad Men, which is set 
in the early 1960s, the New York advertising agency Sterling Cooper is bought 
out by distinguished British stockholders, which does not fail to cause a cul¬ 
ture shock in the small world of Madison Avenue advertising: it is never easy 
to be owned by foreigners. 

The net foreign capital position of the United States turned slightly nega¬ 
tive in the 1980s and then increasingly negative in the 1990s and 1000s as a 
result of accumulating trade deficits. Nevertheless, US investments abroad 
continued to yield a far better return than the nation paid on its foreign-held 
debt—such is the privilege due to confidence in the dollar. This made it pos¬ 
sible to limit the degradation of the negative US position, which amounted to 
roughly 10 percent of national income in the 1990s and slightly more than 20 
percent in the early 2010s. All in all, the current situation is therefore fairly 
close to what obtained on the eve of World War I. The domestic capital of the 
United States is worth about 450 percent of national income. Of this total, 
assets held by foreign investors (minus foreign assets held by US investors) 
represent the equivalent of 20 percent of national income. The net national 
wealth of the United States is therefore about 430 percent of national income. 
In other words, the United States is more than 93 percent American owned 
and less than 5 percent foreign owned. 

To sum up, the net foreign asset position of the United States has at times 
been slightly negative, at other times slightly positive, but these positions were 
always of relatively limited importance compared with the total stock of capi¬ 
tal owned by US citizens (always less than 5 percent and generally less than 2 
percent). 


156 


Value of national capital (% national income) 


FROM OLD EUROPE TO THE NEW WORLD 



FIGURE 4.9. Capital in Canada, 1860-2010 

In Canada, a substantial part of domestic capital has always been held by the rest of the 
world, so that national capital has always been less than domestic capital. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


Canada: Long Oivned by the Crown 

It is interesting to observe that things took a very different course in Canada, 
where a very significant share of domestic capital—as much as a quarter in the 
late nineteenth and early twentieth century—was owned by foreign investors, 
mainly British, especially in the natural resources sector (copper, zinc, and 
aluminum mines as well as hydrocarbons). In 1910, Canada’s domestic capital 
was valued at 530 percent of national income. Of this total, assets owned by 
foreign investors (less foreign assets owned by Canadian investors) repre¬ 
sented the equivalent of 120 percent of national income, somewhere between 
one-fifth and one-quarter of the total. Canada’s net national wealth was thus 
equal to about 410 percent of national income (see Figure 4.9). 11 

Two world wars changed this situation considerably, as Europeans were 
forced to sell many foreign assets. This took time, however: from 1950 to 1990, 
Canada’s net foreign debt represented roughly 10 percent of its domestic capi¬ 
tal. Public debt rose toward the end of the period before being consolidated 


157 
























THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


after 1990. 12 Today, Canada’s situation is fairly close to that of the United 
States. Its domestic capital is worth roughly 410 percent of its national in¬ 
come. Of this total, assets owned by foreign investors (less foreign assets own 
by Canadian investors) represent less than 10 percent of national income. 
Canada is thus more than 98 percent Canadian owned and less than 2 per¬ 
cent foreign owned. (Note, however, that this view of net foreign capital 
masks the magnitude of cross-ownership between countries, about which I 
will say more in the next chapter.) 

This comparison of the United States with Canada is interesting, because it 
is difficult to find purely economic reasons why these two North American 
trajectories should differ so profoundly. Clearly, political factors played a central 
role. Although the United States has always been quite open to foreign invest¬ 
ment, it is fairly difficult to imagine that nineteenth-century US citizens would 
have tolerated a situation in which one-quarter of the country was owned by its 
former colonizer. 13 This posed less of a problem in Canada, which remained a 
British colony: the fact that a large part of the country was owned by Britain 
was therefore not so different from the fact that Londoners owned much of the 
land and many of the factories in Scotland or Sussex. Similarly, the fact that 
Canada’s net foreign assets remained negative for so long is linked to the ab¬ 
sence of any violent political rupture (Canada gradually gained independence 
from Britain, but its head of state remained the British monarch) and hence to 
the absence of expropriations of the kind that elsewhere in the world generally 
accompanied access to independence, especially in regard to natural resources. 

New World and Old World: The Importance of Slavery 

I cannot conclude this examination of the metamorphoses of capital in Eu¬ 
rope and the United States without examining the issue of slavery and the 
place of slaves in US fortunes. 

Thomas Jefferson owned more than just land. He also owned more than 
six hundred slaves, mostly inherited from his father and father-in-law, and his 
political attitude toward the slavery question was always extremely ambigu¬ 
ous. His ideal republic of small landowners enjoying equal rights did not in¬ 
clude people of color, on whose forced labor the economy of his native Vir¬ 
ginia largely depended. After becoming president of the United States in 1801 
thanks to the votes of the southern states, he nevertheless signed a law ending 


158 


FROM OLD EUROPE TO THE NEW WORLD 


the import of new slaves to US soil after 1808. This did not prevent a sharp 
increase in the number of slaves (natural increase was less costly than buying 
new slaves), which rose from around 400,000 in the 1770s to 1 million in the 
1800 census. The number more than quadrupled again between 1800 and the 
census of i860, which counted more than 4 million slaves: in other words, the 
number of slaves had increased tenfold in less than a century. The slave econ¬ 
omy was growing rapidly when the Civil War broke out in 1861, leading ulti¬ 
mately to the abolition of slavery in 1865. 

In 1800, slaves represented nearly 20 percent of the population of the 
United States: roughly 1 million slaves out of a total population of 5 million. In 
the South, where nearly all of the slaves were held, 14 the proportion reached 
40 percent: 1 million slaves and 1.5 million whites for a total population of 
2.5 million. Not all whites owned slaves, and only a tiny minority owned as many 
as Jefferson: fortunes based on slavery were among the most concentrated of all. 

By i860, the proportion of slaves in the overall population of the United 
States had fallen to around 15 percent (about 4 million slaves in a total popu¬ 
lation of 30 million), owing to rapid population growth in the North and 
West. In the South, however, the proportion remained at 40 percent: 4 mil¬ 
lion slaves and 6 million whites for a total population of 10 million. 

We can draw on any number of historical sources to learn about the price 
of slaves in the United States between 1770 and 1865. These include probate 
records assembled by Alice Hanson Jones, tax and census data used by Ray¬ 
mond Goldsmith, and data on slave market transactions collected primarily by 
Robert Fogel. By comparing these various sources, which are quite consistent 
with one another, I compiled the estimates shown in Figures 4.10 and 4.11. 

What one finds is that the total market value of slaves represented nearly a 
year and a half of US national income in the late eighteenth century and the 
first half of the nineteenth century, which is roughly equal to the total value 
of farmland. If we include slaves along with other components of wealth, we 
find that total American wealth has remained relatively stable from the colo¬ 
nial era to the present, at around four and a half years of national income (see 
Figure 4.10). To add the value of slaves to capital in this way is obviously a 
dubious thing to do in more ways than one: it is the mark of a civilization in 
which some people were treated as chattel rather than as individuals endowed 
with rights, including in particular the right to own property. 15 But it does 
allow us to measure the importance of slave capital for slave owners. 


159 


Value of national capital (% national income) 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 



figure 4.10. Capital and slavery in the United States 

The market value of slaves was about 1.5 years of US national income around 1770 (as 
much as land). 

Sources and series: see piketty.pse.ens.fr/capitaliic. 


This emerges even more clearly when we distinguish southern from north¬ 
ern states and compare the capital structure in the two regions (slaves included) 
in the period 1770-1810 with the capital structure in Britain and France in 
the same period (Figure 4.11). In the American South, the total value of slaves 
ranged between two and a half and three years of national income, so that the 
combined value of farmland and slaves exceeded four years of national in¬ 
come. All told, southern slave owners in the New World controlled more 
wealth than the landlords of old Europe. Their farmland was not worth very 
much, but since they had the bright idea of owning not just the land but also 
the labor force needed to work that land, their total capital was even greater. 

If one adds the market value of slaves to other components of wealth, the 
value of southern capital exceeds six years of the southern states’ income, or 
nearly as much as the total value of capital in Britain and France. Conversely, 
in the North, where there were virtually no slaves, total wealth was indeed 
quite small: barely three years of the northern states’ income, half as much as 
in the south or Europe. 

160 























Value of capital (% national income) 


FROM OLD EUROPE TO THE NEW WORLD 



FIGURE 4.11. Capital around 1770-1810: Old and New World 
The combined value of agricultural land and slaves in the Southern United States sur¬ 
passed four years of national income around 1770-1810. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


Clearly, the antebellum United States was far from the country without 
capital discussed earlier. In fact, the New World combined two diametrically 
opposed realities. In the North we find a relatively egalitarian society in 
which capital was indeed not worth very much, because land was so abundant 
that anyone could became a landowner relatively cheaply, and also because 
recent immigrants had not had time to accumulate much capital. In the 
South we find a world where inequalities of ownership took the most extreme 
and violent form possible, since one half of the population owned the other 
half: here, slave capital largely supplanted and surpassed landed capital. 

This complex and contradictory relation to inequality largely persists in 
the United States to this day: on the one hand this is a country of egalitarian 
promise, a land of opportunity for millions of immigrants of modest back¬ 
ground; on the other it is a land of extremely brutal inequality, especially in 
relation to race, whose effects are still quite visible. (Southern blacks were de¬ 
prived of civil rights until the 1960s and subjected to a regime of legal segrega¬ 
tion that shared some features in common with the system of apartheid that 
was maintained in South Africa until the 1980s.) This no doubt accounts for 























































THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


many aspects of the development—or rather nondevelopment—of the US 
welfare state. 


Slave Capital and Human Capital 

I have not tried to estimate the value of slave capital in other slave societies. In 
the British Empire, slavery was abolished in 1833-1838. In the French Empire 
it was abolished in two stages (first abolished in 1792, restored by Napoleon in 
1803, abolished definitively in 1848). In both empires, in the eighteenth and 
early nineteenth centuries a portion of foreign capital was invested in planta¬ 
tions in the West Indies (think of Sir Thomas in Mansfield Park ) or in slave es¬ 
tates on islands in the Indian Ocean (the lie Bourbon and lie de France, which 
became Reunion and Mauritius after the French Revolution). Among the assets 
of these plantations were slaves, whose value I have not attempted to calculate 
separately. Since total foreign assets did not exceed 10 percent of national in¬ 
come in these two countries at the beginning of the nineteenth century, the 
share of slaves in total wealth was obviously smaller than in the United States. 16 

Conversely, in societies where slaves represent a large share of the popula¬ 
tion, their market value can easily reach very high levels, potentially even 
higher than it did in the United States in 1770-1810 and greater than the value 
of all other forms of wealth. Take an extreme case in which virtually an entire 
population is owned by a tiny minority. Assume for the sake of argument that 
the income from labor (that is, the yield to slave owners on the labor of their 
slaves) represents 60 percent of national income, the income on capital (mean¬ 
ing the return on land and other capital in the form of rents, profits, etc.) 
represents 40 percent of national income, and the return on all forms of non¬ 
human capital is 5 percent a year. 

By definition, the value of national capital (excluding slaves) is equal to 
eight years of national income: this is the first fundamental law of capitalism 
((3 = a/r), introduced in Chapter 1. 

In a slave society, we can apply the same law to slave capital: if slaves yield 
the equivalent of 60 percent of national income, and the return on all forms 
of capital is 5 percent a year, then the market value of the total stock of slaves 
is equal to twelve years of national income—or half again more than national 
nonhuman capital, simply because slaves yield half again as much as nonhuman 
capital. If we add the value of slaves to the value of capital, we of course obtain 


162 


FROM OLD EUROPE TO THE NEW WORLD 


twenty years of national income, since the total annual flow of income and 
output is capitalized at a rate of 5 percent. 

In the case of the United States in the period 1770-1810, the value of slave 
capital was on the order of one and a half years of national income (and not 
twelve years), in part because the proportion of slaves in the population was 
20 percent (and not 100 percent) and in part because the average productivity 
of slaves was slightly below the average productivity of free labor and the rate 
of return on slave capital was generally closer to 7 or 8 percent, or even higher, 
than it was to 5 percent, leading to a lower capitalization. In practice, in the 
antebellum United States, the market price of a slave was typically on the or¬ 
der of ten to twelve years of an equivalent free worker’s wages (and not twenty 
years, as equal productivity and a return of 5 percent would require). In i860, 
the average price of a male slave of prime working age was roughly $2,000, 
whereas the average wage of a free farm laborer was on the order of $200. 17 
Note, however, that the price of a slave varied widely depending on various 
characteristics and on the owner’s evaluation; for example, the wealthy planter 
Quentin Tarantino portrays in Django Unchained is prepared to sell beautiful 
Broomhilda for only $700 but wants $12,000 for his best fighting slaves. 

In any case, it is clear that this type of calculation makes sense only in a 
slave society, where human capital can be sold on the market, permanently 
and irrevocably. Some economists, including the authors of a recent series of 
World Bank reports on “the wealth of nations,” choose to calculate the total 
value of “human capital” by capitalizing the value of the income flow from 
labor on the basis of a more or less arbitrary annual rate of return (typically 
4-5 percent). These reports conclude with amazement that human capital is 
the leading form of capital in the enchanted world of the twenty-first century. 
In reality, this conclusion is perfectly obvious and would also have been true 
in the eighteenth century: whenever more than half of national income goes 
to labor and one chooses to capitalize the flow of labor income at the same or 
nearly the same rate as the flow of income to capital, then by definition the 
value of human capital is greater than the value of all other forms of capital. 
There is no need for amazement and no need to resort to a hypothetical capi¬ 
talization to reach this conclusion. (It is enough to compare the flows.). 18 At¬ 
tributing a monetary value to the stock of human capital makes sense only in 
societies where it is actually possible to own other individuals fully and 
entirely—societies that at first sight have definitively ceased to exist. 


163 


{ FIVE } 


The Capital/Income Ratio over 
the Long Run 


In the previous chapter I examined the metamorphoses of capital in Europe and 
North America since the eighteenth century. Over the long run, the nature of 
wealth was totally transformed: capital in the form of agricultural land was 
gradually replaced by industrial and financial capital and urban real estate. Yet 
the most striking fact was surely that in spite of these transformations, the total 
value of the capital stock, measured in years of national income—the ratio that 
measures the overall importance of capital in the economy and society—appears 
not to have changed very much over a very long period of time. In Britain and 
France, the countries for which we possess the most complete historical data, 
national capital today represents about five or six years of national income, 
which is just slightly less than the level of wealth observed in the eighteenth and 
nineteenth centuries and right up to the eve of World War I (about six or seven 
years of national income). Given the strong, steady increase of the capital/in¬ 
come ratio since the 1950s, moreover, it is natural to ask whether this increase 
will continue in the decades to come and whether the capital/income ratio will 
regain or even surpass past levels before the end of the twenty-first century. 

The second salient fact concerns the comparison between Europe and the 
United States. Unsurprisingly, the shocks of the 1914-1945 period affected 
Europe much more strongly, so that the capital/income ratio was lower there 
from the 1920s into the 1980s. If we except this lengthy period of war and its 
aftermath, however, we find that the capital/income ratio has always tended 
to be higher in Europe. This was true in the nineteenth and early twentieth 
centuries (when the capital/income ratio was 6 to 7 in Europe compared with 
4 to 5 in the United States) and again in the late twentieth and early twenty- 
first centuries: private wealth in Europe again surpassed US levels in the early 
1990s, and the capital/income ratio there is close to 6 today, compared with 
slightly more than 4 in the United States (see Figures 5.1 and 5.2). 1 


164 


THE CAPITAL/INCOME RATIO OVER THE LONG RUN 



figure 5.1. Private and public capital: Europe and America, 1870-2010 

The fluctuations of national capital in the long run correspond mostly to the fluctua¬ 
tions of private capital (both in Europe and in the United States). 

Sources and series: see piketty.pse.ens.fr/capital21c. 


o o 

U 


G 

Uh 

O 

<u 

3 

£ 


800% 

700% 

600% 

500% 

400% 

300% 

100% 

100% 

0% 


-100% 



1870 


1890 


1910 


1930 


1950 


1970 


1990 


figure 5.2. National capital in Europe and America, 1870-2010 

National capital (public and private) is worth 6.5 years of national income in Europe in 
1910, versus 4.5 years in America. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


165 















































































THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


These facts remain to be explained. Why did the capital/income ratio re¬ 
turn to historical highs in Europe, and why should it be structurally higher in 
Europe than in the United States? What magical forces imply that capital in 
one society should be worth six or seven years of national income rather than 
three or four? Is there an equilibrium level for the capital/income ratio, and if 
so how is it determined, what are the consequences for the rate of return on 
capital, and what is the relation between it and the capital-labor split of na¬ 
tional income? To answer these questions, I will begin by presenting the dy¬ 
namic law that allows us to relate the capital/income ratio in an economy to 
its savings and growth rates. 

The Second Fundamental Law of Capitalism: (3 —s/g 

In the long run, the capital/income ratio (3 is related in a simple and transpar¬ 
ent way to the savings rate s and the growth rate g according to the following 
formula: 

( 3 =s/g 

For example, if 5 = 12% and^= 1%, then § = s/g= 6 oo %. 2 

In other words, if a country saves 11 percent of its national income every 
year, and the rate of growth of its national income is 1 percent per year, then 
in the long run the capital/income ratio will be equal to 600 percent: the 
country will have accumulated capital worth six years of national income. 

This formula, which can be regarded as the second fundamental law of 
capitalism, reflects an obvious but important point: a country that saves a lot 
and grows slowly will over the long run accumulate an enormous stock of 
capital (relative to its income), which can in turn have a significant effect on 
the social structure and distribution of wealth. 

Let me put it another way: in a quasi-stagnant society, wealth accumu¬ 
lated in the past will inevitably acquire disproportionate importance. 

The return to a structurally high capital/income ratio in the twenty-first 
century, close to the levels observed in the eighteenth and nineteenth centu¬ 
ries, can therefore be explained by the return to a slow-growth regime. De¬ 
creased growth—especially demographic growth—is thus responsible for 
capital’s comeback. 


166 


THE CAPITAL/INCOME RATIO OVER THE LONG RUN 


The basic point is that small variations in the rate of growth can have very 
large effects on the capital/income ratio over the long run. 

For example, given a savings rate of 12 percent, if the rate of growth falls to 
1.5 percent a year (instead of 2 percent), then the long-term capital/income 
ratio (3 =s/g will rise to eight years of national income (instead of six). If the 
growth rate falls to 1 percent, then § = s/g will rise to twelve years, indicative 
of a society twice as capital intensive as when the growth rate was 2 percent. 
In one respect, this is good news: capital is potentially useful to everyone, and 
provided that things are properly organized, everyone can benefit from it. In 
another respect, however, what this means is that the owners of capital—for a 
given distribution of wealth—potentially control a larger share of total eco¬ 
nomic resources. In any event, the economic, social, and political repercus¬ 
sions of such a change are considerable. 

On the other hand if the growth rate increases to 3 percent, then (3 —s/g 
will fall to just four years of national income. If the savings rate simultane¬ 
ously decreases slightly to s= 9 percent, then the long-run capital/income ra¬ 
tio will decline to 3. 

These effects are all the more significant because the growth rate that fig¬ 
ures in the law (3=5 /g is the overall rate of growth of national income, that is, 
the sum of the per capita growth rate and the population growth rate. 3 In 
other words, for a savings rate on the order of 10-12 percent and a growth rate 
of national income per capita on the order of 1.5-2 percent a year, it follows 
immediately that a country that has near-zero demographic growth and 
therefore a total growth rate close to 1.5-2 percent, as in Europe, can expect to 
accumulate a capital stock worth six to eight years of national income, whereas 
a country with demographic growth on the order of 1 percent a year and 
therefore a total growth rate of 2.5-3 percent, as in the United States, will ac¬ 
cumulate a capital stock worth only three to four years of national income. 
And if the latter country tends to save a little less than the former, perhaps 
because its population is not aging as rapidly, this mechanism will be further 
reinforced as a result. In other words, countries with similar growth rates of 
income per capita can end up with very different capital/income ratios simply 
because their demographic growth rates are not the same. 

This law allows us to give a good account of the historical evolution of the 
capital/income ratio. In particular, it enables us to explain why the capital/ 
income ratio seems now—after the shocks of 1914-1945 and the exceptionally 


167 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


rapid growth phase of the second half of the twentieth century—to be re¬ 
turning to very high levels. It also enables us to understand why Europe tends 
for structural reasons to accumulate more capital than the United States (or 
at any rate will tend to do so as long as the US demographic growth rate re¬ 
mains higher than the European, which probably will not be forever). But 
before I can explain this phenomenon, I must make several conceptual and 
theoretical points more precise. 

A Long-Term Law 

First, it is important to be clear that the second fundamental law of capital¬ 
ism, §=s/g, is applicable only if certain crucial assumptions are satisfied. 
First, this is an asymptotic law, meaning that it is valid only in the long run: if 
a country saves a proportion s of its income indefinitely, and if the rate of 
growth of its national income is g permanently, then its capital/income ratio 
will tend closer and closer to (3 —slg and stabilize at that level. This won’t hap¬ 
pen in a day, however: if a country saves a proportion s of its income for only a 
few years, it will not be enough to achieve a capital/income ratio of (3 = j /g. 

For example, if a country starts with zero capital and saves 12 percent of its 
national income for a year, it obviously will not accumulate a capital stock 
worth six years of its income. With a savings rate of 12 percent a year, starting 
from zero capital, it will take fifty years to save the equivalent of six years of 
income, and even then the capital/income ratio will not be equal to 6, because 
national income will itself have increased considerably after half a century 
(unless we assume that the growth rate is actually zero). 

The first principle to bear in mind is, therefore, that the accumulation of 
wealth takes time: it will take several decades for the law (3 = slg to become 
true. Now we can understand why it took so much time for the shocks of 1914- 
1945 to fade away, and why it is so important to take a very long historical view 
when studying these questions. At the individual level, fortunes are sometimes 
amassed very quickly, but at the country level, the movement of the capital/ 
income ratio described by the law (3 = s/gis a long-run phenomenon. 

Hence there is a crucial difference between this law and the law a = r X ( 3 , 
which I called the first fundamental law of capitalism in Chapter 1. Accord¬ 
ing to that law, the share of capital income in national income, a, is equal to 
the average rate of return on capital, r, times the capital/income ratio, ( 3 . It is 


168 


THE CAPITAL/INCOME RATIO OVER THE LONG RUN 


important to realize that the law a = r X (3 is actually a pure accounting iden¬ 
tity, valid at all times in all places, by construction. Indeed, one can view it as 
a definition of the share of capital in national income (or of the rate of return 
on capital, depending on which parameter is easiest to measure) rather than 
as a law. By contrast, the law (3 = 5 /g is the result of a dynamic process: it rep¬ 
resents a state of equilibrium toward which an economy will tend if the sav¬ 
ings rate is j and the growth ratey, but that equilibrium state is never perfectly 
realized in practice. 

Second, the law (3 =s/gis valid only if one focuses on those forms of capi¬ 
tal that human beings can accumulate. If a significant fraction of national 
capital consists of pure natural resources (i.e., natural resources whose value is 
independent of any human improvement and any past investment), then (3 
can be quite high without any contribution from savings. I will say more later 
about the practical importance of nonaccumulable capital. 

Finally, the law (3 = t Ig is valid only if asset prices evolve on average in the 
same way as consumer prices. If the price of real estate or stocks rises faster 
than other prices, then the ratio (3 between the market value of national capi¬ 
tal and the annual flow of national income can again be quite high without 
the addition of any new savings. In the short run, variations (capital gains or 
losses) of relative asset prices (i.e., of asset prices relative to consumer prices) 
are often quite a bit larger than volume effects (i.e., effects linked to new sav¬ 
ings). If we assume, however, that price variations balance out over the long 
run, then the law (3 =s/gis necessarily valid, regardless of the reasons why the 
country in question chooses to save a proportion s of its national income. 

This point bears emphasizing: the law (3 = s /g is totally independent of the 
reasons why the residents of a particular country—or their government— 
accumulate wealth. In practice, people accumulate capital for all sorts of rea¬ 
sons: for instance, to increase future consumption (or to avoid a decrease in 
consumption after retirement), or to amass or preserve wealth for the next 
generation, or again to acquire the power, security, or prestige that often come 
with wealth. In general, all these motivations are present at once in propor¬ 
tions that vary with the individual, the country, and the age. Quite often, all 
these motivations are combined in single individuals, and individuals them¬ 
selves may not always be able to articulate them clearly. In Part Three I discuss 
in depth the significant implications of these various motivations and mecha¬ 
nisms of accumulation for inequality and the distribution of wealth, the role 


169 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


of inheritance in the structure of inequality, and, more generally, the social, 
moral, and political justification of disparities in wealth. At this stage I am 
simply explaining the dynamics of the capital/income ratio (a question that 
can be studied, at least initially, independently of the question of how wealth 
is distributed). The point I want to stress is that the law (3 =s/g applies in all 
cases, regardless of the exact reasons for a country’s savings rate. 

This is due to the simple fact that (3 =s/g is the only stable capital/income 
ratio in a country that saves a fraction s of its income, which grows at a rate g. 

The argument is elementary. Let me illustrate it with an example. In con¬ 
crete terms: if a country is saving 12 percent of its income every year, and if its 
initial capital stock is equal to six years of income, then the capital stock will 
grow at 2 percent a year, 4 thus at exactly the same rate as national income, so 
that the capital/income ratio will remain stable. 

By contrast, if the capital stock is less than six years of income, then a sav¬ 
ings rate of 12 percent will cause the capital stock to grow at a rate greater than 
2 percent a year and therefore faster than income, so that the capital/income 
ratio will increase until it attains its equilibrium level. 

Conversely, if the capital stock is greater than six years of annual income, 
then a savings rate of 12 percent implies that capital is growing at less than 2 
percent a year, so that the capital/income ratio cannot be maintained at that 
level and will therefore decrease until it reaches equilibrium. 

In each case, the capital/income ratio tends over the long run toward its 
equilibrium level (3 =s/g (possibly augmented by pure natural resources), pro¬ 
vided that the average price of assets evolves at the same rate as consumption 
prices over the long run. 5 

To sum up: the law (3 = s/g does not explain the short-term shocks to 
which the capital/income ratio is subject, any more than it explains the exis¬ 
tence of world wars or the crisis of 1929—events that can be taken as examples 
of extreme shocks—but it does allow us to understand the potential equilib¬ 
rium level toward which the capital/income ratio tends in the long run, when 
the effects of shocks and crises have dissipated. 

Capital’s Comeback in Rich Countries since the ipyos 

In order to illustrate the difference between short-term and long-term move¬ 
ments of the capital/income ratio, it is useful to examine the annual changes 


170 


Value of private capital (% national income) 


THE CAPITAL/INCOME RATIO OVER THE LONG RUN 


800% 

700% 

600% 

500% 

400% 

300% 

100% 

100% 

1970 1975 1980 1985 1990 1995 ZOOO ZOOS ZOIO 



FIGURE 5.3. Private capital in rich countries, 1970-2010 

Private capital is worth between two and 3.5 years of national income in rich countries 
in 1970, and between four and seven years of national income in 2010. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


observed in the wealthiest countries between 1970 and 2010, a period for 
which we have reliable and homogeneous data for a large number of coun¬ 
tries. To begin, here is a look at the ratio of private capital to national income, 
whose evolution is shown in Figure 5.3 for the eight richest countries in the 
world, in order of decreasing GDP: the United States, Japan, Germany, 
France, Britain, Italy, Canada, and Australia. 

Compared with Figures 5.1 and 5.2, as well as with the figures that accom¬ 
panied previous chapters, which presented decennial averages in order to focus 
attention on long-term trends, Figure 3.3 displays annual series and shows that 
the capital/income ratio in all countries varied constantly in the very short run. 
These erratic changes are due to the fact that the prices of real estate (including 
housing and business real estate) and financial assets (especially shares of stock) 
are notoriously volatile. It is always very difficult to set a price on capital, in part 
because it is objectively complex to foresee the future demand for the goods and 
services generated by a firm or by real estate and therefore to predict the future 
flows of profit, dividends, royalties, rents, and so on that the assets in question 
will yield, and in part because the present value of a building or corporation 
depends not only on these fundamental factors but also on the price at which 


171 





























THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


one can hope to sell these assets if the need arises (that is, on the anticipated 
capital gain or loss). 

Indeed, these anticipated future prices themselves depend on the general 
enthusiasm for a given type of asset, which can give rise to so-called self- 
fulfilling beliefs: as long as one can hope to sell an asset for more than one paid 
for it, it may be individually rational to pay a good deal more than the funda¬ 
mental value of that asset (especially since the fundamental value is itself uncer¬ 
tain), thus giving in to the general enthusiasm for that type of asset, even though 
it may be excessive. That is why speculative bubbles in real estate and stocks 
have existed as long as capital itself; they are consubstantial with its history. 

As it happens, the most spectacular bubble in the period 1970-2010 was 
surely the Japanese bubble of 1990 (see Figure 5.3). During the 1980s, the value 
of private wealth shot up in Japan from slightly more than four years of na¬ 
tional income at the beginning of the decade to nearly seven at the end. 
Clearly, this enormous and extremely rapid increase was partly artificial: the 
value of private capital fell sharply in the early 1990s before stabilizing at 
around six years of national income from the mid-1990s on. 

I will not rehearse the history of the numerous real estate and stock mar¬ 
ket bubbles that inflated and burst in the rich countries after 1970, nor will I 
attempt to predict future bubbles, which I am quite incapable of doing in any 
case. Note, however, the sharp correction in the Italian real estate market in 
1994-1993 and the bursting of the Internet bubble in 2000-2001, which 
caused a particularly sharp drop in the capital/income ratio in the United 
States and Britain (though not as sharp as the drop in Japan ten years earlier). 
Note, too, that the subsequent US real estate and stock market boom contin¬ 
ued until 2007, followed by a deep drop in the recession of 2008-2009. In 
two years, US private fortunes shrank from five to four years of national in¬ 
come, a drop of roughly the same size as the Japanese correction of 1991-1992. 
In other countries, and particularly in Europe, the correction was less severe 
or even nonexistent: in Britain, France, and Italy, the price of assets, especially 
in real estate, briefly stabilized in 2008 before starting upward again in 2009- 
2010, so that by the early 2010s private wealth had returned to the level at¬ 
tained in 2007, if not slightly higher. 

The important point I want to emphasize is that beyond these erratic and 
unpredictable variations in short-term asset prices, variations whose ampli¬ 
tude seems to have increased in recent decades (and we will see later that this 


172 


THE CAPITAL/INCOME RATIO OVER THE LONG RUN 


can be related to the increase in the potential capital/income ratio), there is 
indeed a long-term trend at work in all of the rich countries in the period 
1970-2010 (see Figure 5.3). At the beginning of the 1970s, the total value of 
private wealth (net of debt) stood between two and three and a half years of 
national income in all the rich countries, on all continents. 6 Forty years later, 
in 2010, private wealth represented between four and seven years of national 
income in all the countries under study. 7 The general evolution is clear: bub¬ 
bles aside, what we are witnessing is a strong comeback of private capital in 
the rich countries since 1970, or, to put it another way, the emergence of a new 
patrimonial capitalism. 

This structural evolution is explained by three sets of factors, which com¬ 
plement and reinforce one another to give the phenomenon a very significant 
amplitude. The most important factor in the long run is slower growth, espe¬ 
cially demographic growth, which, together with a high rate of saving, auto¬ 
matically gives rise to a structural increase in the long-run capital/income ra¬ 
tio, owing to the law §=s/g. This mechanism is the dominant force in the 
very long run but should not be allowed to obscure the two other factors that 
have substantially reinforced its effects over the last few decades: first, the grad¬ 
ual privatization and transfer of public wealth into private hands in the 1970s 
and 1980s, and second, a long-term catch-up phenomenon affecting real estate 
and stock market prices, which also accelerated in the 1980s and 1990s in a 
political context that was on the whole more favorable to private wealth than 
that of the immediate postwar decades. 

Beyond Bubbles: Low Growth, High Saving 

I begin with the first mechanism, based on slower growth coupled with con¬ 
tinued high saving and the dynamic law (3 — slg In Table 5.1 I have indicated 
the average values of the growth rates and private savings rates in the eight 
richest countries during the period 1970-2010. As noted in Chapter 2, the 
rate of growth of per capita national income (or the virtually identical growth 
rate of per capita domestic product) has been quite similar in all the devel¬ 
oped countries over the last few decades. If comparisons are made over peri¬ 
ods of a few years, the differences can be significant, and these often spur na¬ 
tional pride or jealousy. But if one takes averages over longer periods, the fact 
is that all the rich countries are growing at approximately the same rate. 


173 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


Between 1970 and 2010, the average annual rate of growth of per capita na¬ 
tional income ranged from 1.6 to 2.0 percent in the eight most developed 
countries and more often than not remained between 1.7 and 1.9 percent. 
Given the imperfections of the available statistical measures (especially price 
indices), it is by no means certain that such small differences are statistically 
significant. 8 

In any case, these differences are very small compared with differences in 
the demographic growth rate. In the period 1970-2010, population grew at 
less than 0.5 percent per year in Europe and Japan (and closer to o percent in 
the period 1990-2010, or in Japan even at a negative rate), compared with 1.0-1.5 
percent in the United States, Canada, and Australia (see Table 5.1). Hence the 
overall growth rate for the period 1970-2010 was significantly higher in the 
United States and the other new countries than in Europe or Japan: around 3 
percent a year in the former (or perhaps even a bit more), compared with 
barely 2 percent in the latter (or even just barely 1.5 percent in the most recent 
subperiod). Such differences may seem small, but over the long run they 
mount up, so that in fact they are quite significant. The new point I want to 
stress here is that such differences in growth rates have enormous effects on 


table 5.1. 

Growth rates and saving rates in rich countries, 1970-2010 


Country 

Growth rate 

of national 
income (%) 

Growth rate 
of population 

(%) 

Growth rate of per 
capita national 
income (%) 

Private saving 
(net of depreciation) 
(% national income) 

United States 

2.8 

1.0 

1.8 

77 

Japan 

2-5 

0.5 

2.0 

14.6 

Germany 

2.0 

0.2 

1.8 

12.2 

France 

2.2 

0.5 

i -7 

II.I 

Britain 

2.2 

0.3 

i -9 

7-3 

Italy 

i -9 

0.3 

1.6 

15.0 

Canada 

2.8 

1.1 

17 

12.1 

Australia 

3-2 

i -4 

17 

9-9 


Note: Saving rates and demographic growth vary a lot within rich countries; growth rates of per capita national 
income vary much less. 

Sources : See piketty.pse.ens.fr/capitaluc. 


174 





THE CAPITAL/INCOME RATIO OVER THE LONG RUN 


the long-run accumulation of capital and largely explain why the capital/in- 
come ratio is structurally higher in Europe and Japan than in the United 
States. 

Turning now to average savings rates in the period 1970-2010, again one 
finds large variations between countries: the private savings rate generally 
ranges between 10 and 12 percent of national income, but it is as low as 7 to 8 
percent in the United States and Britain and as high as 14-15 percent in Japan 
and Italy (see Table 5.1). Over forty years, these differences mount up to create 
significant variation. Note, too, that the countries that save the most are often 
those whose population is stagnant and aging (which may justify saving for 
the purpose of retirement and bequest), but the relation is far from system¬ 
atic. As noted, there are many reasons why one might choose to save more or 
less, and it comes as no surprise that many factors (linked to, among other 
things, culture, perceptions of the future, and distinctive national histories) 
come into play, just as they do in regard to decisions concerning childbearing 
and immigration, which ultimately help to determine the demographic 
growth rate. 

If one now combines variations in growth rates with variations in savings 
rate, it is easy to explain why different countries accumulate very different 
quantities of capital, and why the capital/income ratio has risen sharply since 
1970. One particularly clear case is that of Japan: with a savings rate close to 15 
percent a year and a growth rate barely above 2 percent, it is hardly surprising 
that Japan has over the long run accumulated a capital stock worth six to 
seven years of national income. This is an automatic consequence of the dy¬ 
namic law of accumulation, $ = s/g. Similarly, it is not surprising that the 
United States, which saves much less than Japan and is growing faster, has a 
significantly lower capital/income ratio. 

More generally, if one compares the level of private wealth in 2010 pre¬ 
dicted by the savings flows observed between 1970 and 2010 (together with 
the initial wealth observed in 1970) with the actual observed levels of wealth 
in 2010, one finds that the two numbers are quite similar for most countries. 9 
The correspondence is not perfect, which shows that other factors also play a 
significant role. For instance, in the British case, the flow of savings seems 
quite inadequate to explain the very steep rise in private wealth in this period. 

Looking beyond the particular circumstances of this or that country, 
however, the results are overall quite consistent: it is possible to explain the 


175 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


main features of private capital accumulation in the rich countries between 
1970 and 2010 in terms of the quantity of savings between those two dates 
(along with the initial capital endowment) without assuming a significant 
structural increase in the relative price of assets. In other words, movements 
in real estate and stock market prices always dominate in the short and even 
medium run but tend to balance out over the long run, where volume effects 
appear generally to be decisive. 

Once again, the Japanese case is emblematic. If one tries to understand the 
enormous increase in the capital/income ratio in the 1980s and the sharp 
drop in the early 1990s, it is clear that the dominant phenomenon was the 
formation of a bubble in real estate and stocks, which then collapsed. But if 
one seeks to understand the evolution observed over the entire period 1970- 
2010, it is clear that volume effects outweighed price effects: the fact that pri¬ 
vate wealth in Japan rose from three years of national income in 1970 to six in 
2010 is predicted almost perfectly by the flow of savings . 10 

The Two Components of Private Saving 

For the sake of completeness, I should make clear that private saving consists 
of two components: savings made directly by private individuals (this is the 
part of disposable household income that is not consumed immediately) and 
savings by firms on behalf of the private individuals who own them, directly 
in the case of individual firms or indirectly via their financial investments. 
This second component consists of profits reinvested by firms (also referred to 
as “retained earnings”) and in some countries accounts for as much as half the 
total amount of private savings (see Table 5.2). 

If one were to ignore this second component of savings and consider only 
household savings strictly defined, one would conclude that savings flows in 
all countries are clearly insufficient to account for the growth of private 
wealth, which one would then explain largely in terms of a structural increase 
in the relative price of assets, especially shares of stock. Such a conclusion 
would be correct in accounting terms but artificial in economic terms: it is 
true that stock prices tend to rise more quickly than consumption prices over 
the long run, but the reason for this is essentially that retained earnings allow 
firms to increase their size and capital (so that we are looking at a volume ef- 


176 


THE CAPITAL/INCOME RATIO OVER THE LONG RUN 


TABLE 5.2. 

Private saving in rich countries, 1970-2010 


Country 

Private saving (net 
of depreciation) 

(% national income) 

Incl. household 
net saving (%) 

Incl. corporate net 
saving (net retained 
earnings) (%) 

United States 

7-7 

4.6 

3 -i 

Japan 

14.6 

6.8 

7.8 

Germany 

12.2 

9-4 

2.8 

France 

II.I 

9.0 

2.1 

Britain 

7-4 

2.8 

4.6 

Italy 

15.0 

14.6 

0.4 

Canada 

12.1 

7 -i 

4-9 

Australia 

9-9 

5-9 

3-9 


Note: A large part (variable across countries) of private saving comes from corporate retained earnings 
(undistributed profits). 

Sources: See piketty.pse.ens.fr/capital21c. 


feet rather than a price effect). If retained earnings are included in private 
savings, however, the price effect largely disappears. 

In practice, from the standpoint of shareholders, profits paid out directly 
as dividends are often more heavily taxed than retained earnings: hence it 
may be advantageous for the owners of capital to pay only a limited share of 
profits as dividends (to meet their immediate consumption needs) and leave 
the rest to accumulate and be reinvested in the firm and its subsidiaries. Later, 
some shares can be sold in order to realize the capital gains (which are gener¬ 
ally taxed less heavily than dividends). 11 The variation between countries with 
respect to the proportion of retained earnings in total private savings can 
be explained, moreover, largely by differences in legal and tax systems; 
these are accounting differences rather than actual economic differences. 
Under these conditions, it is better to treat retained earnings as savings 
realized on behalf of the firm’s owners and therefore as a component of 
private saving. 


177 





THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


I should also be clear that the notion of savings relevant to the dynamic 
law §=s/g is savings net of capital depreciation, that is, truly new savings, or 
the part of total savings left over after we deduct the amount needed to com¬ 
pensate for wear and tear on buildings and equipment (to repair a hole in the 
roof or a pipe or to replace a worn-out automobile, computer, machine, or 
what have you). The difference is important, because annual capital deprecia¬ 
tion in the developed economies is on the order of 10-15 percent of national 
income and absorbs nearly half of total savings, which generally run around 
25-30 percent of national income, leaving net savings of 10-15 percent of na¬ 
tional income (see Table 5.3). In particular, the bulk of retained earnings often 
goes to maintaining buildings and equipment, and frequently the amount left 
over to finance net investment is quite small—at most a few percent of na¬ 
tional income—or even negative, if retained earnings are insufficient to cover 
the depreciation of capital. By definition, only net savings can increase the 
capital stock: savings used to cover depreciation simply ensure that the exist¬ 
ing capital stock will not decrease. 12 


table 5.3. 

Gross and net saving in rich countries, igyo-2010 


Country 

Gross private savings 
(% national income) 

Minus: Capital 
depreciation (%) 

Equals: Net 
private saving (%) 

United States 

18.8 

II.I 

7-7 

Japan 

33-4 

18.9 

14.6 

Germany 

28.5 

l6.2 

12.2 

France 

22.0 

10.9 

II.I 

Britain 

197 

12.3 

7-3 

Italy 

30.1 

15.1 

15.0 

Canada 

24-5 

12.4 

12.1 

Australia 

25.1 

15.2 

9-9 


Note-. A large part of gross saving (generally about half) corresponds to capital depreciation; i.e., it is used 
solely to repair or replace used capital. 

Sources-. See piketty.pse.ens.fr/capitalnc. 


178 





THE CAPITAL/INCOME RATIO OVER THE LONG RUN 


Durable Goods and Valuables 

Finally, I want to make it clear that private saving as defined here, and there¬ 
fore private wealth, does not include household purchases of durable goods: 
furniture, appliances, automobiles, and so on. In this respect I am following 
international standards for national accounting, under which durable 
household goods are treated as items of immediate consumption (although 
the same goods, when purchased by firms, are counted as investments with a 
high rate of annual depreciation). This is of limited importance for my pur¬ 
poses, however, because durable goods have always represented a relatively 
small proportion of total wealth, which has not varied much over time: in all 
rich countries, available estimates indicate that the total value of durable 
household goods is generally between 30 and 50 percent of national income 
throughout the period 1970-2010, with no apparent trend. 

In other words, everyone owns on average between a third and half a year’s 
income worth of furniture, refrigerators, cars, and so on, or 10,000-15,000 
euros per capita for a national income on the order of 30,000 euros per capita 
in the early 2010s. This is not a negligible amount and accounts for most of 
the wealth owned by a large segment of the population. Compared, however, 
with overall private wealth of five to six years of national income, or 150,000- 
200,000 euros per person (excluding durable goods), about half of which is in 
the form of real estate and half in net financial assets (bank deposits, stocks, 
bonds, and other investments, net of debt) and business capital, this is only a 
small supplementary amount. Concretely, if we were to include durable goods 
in private wealth, the only effect would be to add 30-50 percent of national 
income to the curves shown in Figure 5.3 without significantly modifying the 
overall evolution . 13 

Note in passing that apart from real estate and business capital, the only 
nonfinancial assets included in national accounts under international stan¬ 
dards (which I have followed scrupulously in order to ensure consistency in 
my comparisons of private and national wealth between countries) are 
“valuables,” including items such as works of art, jewelry, and precious met¬ 
als such as gold and silver, which households acquire as a pure reservoir of 
value (or for their aesthetic value) and which in principle do not deteriorate 
(or deteriorate very little) over time. These valuables are worth much less 
than durable goods by most estimates, however (between 5 and 10 percent 


179 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


of national income, depending on the country, or between 1,500 and 3,000 
per person for a per capita national income of 30,000 euros), hence their 
share of total private wealth is relatively small, even after the recent rise in 
the price of gold. 14 

It is interesting to note that according to available historical estimates, 
these orders of magnitude do not seem to have changed much over the long 
run. Estimates of the value of durable goods are generally around 30-50 per¬ 
cent of national income for both the nineteenth and twentieth centuries. 
Gregory King’s estimates of British national wealth around 1700 show the 
same thing: the total value of furniture, china, and so on was about 30 percent 
of national income. The amount of wealth represented by valuables and precious 
objects seems to have decreased over the long run, however, from 10-15 percent 
of national income in the late nineteenth and early twentieth century to 5-10 
percent today. According to King, the total value of such goods (including 
metal coin) was as high as 25-30 percent of national income around 1700. In all 
cases, these are relatively limited amounts compared to total accumulated wealth 
in Britain of around seven years of national income, primarily in the form of 
farmland, dwellings, and other capital goods (shops, factories, warehouses, 
livestock, ships, etc.), at which King does not fail to rejoice and marvel. 15 

Private Capital Expressed in Years of Disposable Income 

Note, moreover, that the capital/income ratio would have attained even 
higher levels—no doubt the highest ever recorded—in the rich countries in 
the 2000s and 2010s if I had expressed total private wealth in terms of years of 
disposable income rather than national income, as I have done thus far. This 
seemingly technical issue warrants further discussion. 

As the name implies, disposable household income (or simply “disposable 
income”) measures the monetary income that households in a given country 
dispose of directly. To go from national income to disposable income, one 
must deduct all taxes, fees, and other obligatory payments and add all mone¬ 
tary transfers (pensions, unemployment insurance, aid to families, welfare 
payments, etc.). Until the turn of the twentieth century, governments played 
a limited role in social and economic life (total tax payments were on the or¬ 
der of 10 percent of national income, which went essentially to pay for tradi¬ 
tional state functions such as police, army, courts, highways, and so on, so 

180 


Private capital (% disposable household income) 


THE CAPITAL/INCOME RATIO OVER THE LONG RUN 



figure 5.4. Private capital measured in years of disposable income 

Expressed in years of household disposable income (about 70-80 percent of national 
income), the capital/income ratio appears to be larger than when it is expressed in years 
of national income. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


that disposable income was generally around 90 percent of national income). 
The state’s role increased considerably over the course of the twentieth cen¬ 
tury, so that disposable income today amounts to around 70-80 percent of 
national income in the rich countries. As a result, total private wealth ex¬ 
pressed in years of disposable income (rather than national income) is signifi¬ 
cantly higher. For example, private capital in the 1000s represented four to 
seven years of national income in the rich countries, which would correspond 
to five to nine years of disposable income (see Figure 5.4). 

Both ways of measuring the capital/income ratio can be justified, depend¬ 
ing on how one wants to approach the question. When expressed in terms of 
disposable income, the ratio emphasizes strictly monetary realities and shows 
us the magnitude of wealth in relation to the income actually available to 
households (to save, for instance). In a way, this reflects the concrete reality of 
the family bank account, and it is important to keep these orders of magni¬ 
tude in mind. It is also important to note, however, that the gap between dis¬ 
posable income and national income measures by definition the value of pub¬ 
lic services from which households benefit, especially health and education 

181 


































THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


services financed directly by the public treasury. Such “transfers in kind” are 
just as valuable as the monetary transfers included in disposable income: they 
allow the individuals concerned to avoid spending comparable (or even 
greater) sums on private producers of health and education services. Ignoring 
such transfers in kind might well distort certain evolutions or international 
comparisons. That is why it seemed to me preferable to express wealth in years 
of national income: to do so is to adopt an economic (rather than strictly 
monetary) view of income. In this book, whenever I refer to the capital/income 
ratio without further qualification, I am always referring to the ratio of the 
capital stock to the flow of national income . 16 

The Question of Foundations and Other Holders of Capital 

Note also that for the sake of completeness I have included in private wealth 
not only the assets and liabilities of private individuals (“households” in national 
accounting terminology) but also assets and liabilities held by foundations 
and other nonprofit organizations. To be clear, this category includes only 
foundations and other organizations financed primarily by gifts from private 
individuals or income from their properties. Organizations that depend pri¬ 
marily on public subsidies are classified as governmental organizations, and 
those that depend primarily on the sale of goods are classified as corporations. 

In practice, all of these distinctions are malleable and porous. It is rather 
arbitrary to count the wealth of foundations as part of private wealth rather 
than public wealth or to place it in a category of its own, since it is in fact a 
novel form of ownership, intermediate between purely private and strictly 
public ownership. In practice, when we think of the property owned by 
churches over the centuries, or the property owned today by organizations 
such as Doctors without Borders or the Bill and Melinda Gates Foundation, 
it is clear that we are dealing with a wide variety of moral persons pursuing a 
range of specific objectives. 

Note, however, that the stakes are relatively limited, since the amount of 
wealth owned by moral persons is generally rather small compared with what 
physical persons retain for themselves. Available estimates for the various rich 
countries in the period 1970-2010 show that foundations and other non¬ 
profit organizations always own less than 10 percent and generally less than 5 
percent of total private wealth, though with interesting variations between 


182 


THE CAPITAL/INCOME RATIO OVER THE LONG RUN 


countries: barely i percent in France, around 3-4 percent in Japan, and as 
much as 6-7 percent in the United States (with no apparent trend). Available 
historical sources indicate that the total value of church-owned property in 
eighteenth-century France amounted to about 7-8 percent of total private 
wealth, or approximately 50-60 percent of national income (some of this 
property was confiscated and sold during the French Revolution to pay off 
debts incurred by the government of the Ancien Regime). 17 In other words, 
the Catholic Church owned more property in Ancien Regime France (rela¬ 
tive to the total private wealth of the era) than prosperous US foundations 
own today. It is interesting to observe that the two levels are nevertheless 
fairly close. 

These are quite substantial holdings of wealth, especially if we compare 
them with the meager (and sometimes negative) net wealth owned by the 
government at various points in time. Compared with total private wealth, 
however, the wealth of foundations remains fairly modest. In particular, it 
matters little whether or not we include foundations when considering the 
general evolution of the ratio of private capital to national income over the 
long run. Inclusion is justified, moreover, by the fact that it is never easy to 
define the boundary line between on the one hand various legal structures 
such as foundations, trust funds, and the like used by wealthy individuals to 
manage their assets and further their private interests (which are in principle 
counted in national accounts as individual holdings, assuming they are iden¬ 
tified as such) and on the other hand foundations and nonprofits said to be in 
the public interest. I will come back to this delicate issue in Part Three, where 
I will discuss the dynamics of global inequality of wealth, and especially great 
wealth, in the twenty-first century. 

The Privatization of Wealth in the Rich Countries 

The very sharp increase in private wealth observed in the rich countries, and 
especially in Europe and Japan, between 1970 and 2010 thus can be explained 
largely by slower growth coupled with continued high savings, using the law 
(3 —s/g. I will now return to the two other complementary phenomena that 
amplified this mechanism, which I mentioned earlier: the privatization or 
gradual transfer of public wealth into private hands and the “catch-up” of as¬ 
set prices over the long run. 


183 


Value of capital (% national income) 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


-100% 


-A- United States -o- Japan 

- Germany • France 

- Britain Italy 

- Canada -o- Australia 



1970 


2005 


figure 5.5. Private and public capital in rich countries, 1970-2010 

In Italy, private capital rose from 240 percent to 680 percent of national income be¬ 
tween 1970 and 2010, while public capital dropped from 20 percent to —70 percent. 
Sources and series: see piketty.pse.ens.fr/capital21c. 


I begin with privatization. As noted, the proportion of public capital in 
national capital has dropped sharply in recent decades, especially in France 
and Germany, where net public wealth represented as much as a quarter or 
even a third of total national wealth in the period 1950-1970, whereas today it 
represents just a few percent (public assets are just enough to balance public 
debt). This evolution reflects a quite general phenomenon that has affected all 
eight leading developed economies: a gradual decrease in the ratio of public 
capital to national income in the period 1970-2010, accompanied by an in¬ 
crease in the ratio of private capital to national income (see Figure 5.5). In 
other words, the revival of private wealth is partly due to the privatization of 
national wealth. To be sure, the increase in private capital in all countries was 
greater than the decrease in public capital, so national capital (measured in 
years of national income) did indeed increase. But it increased less rapidly 
than private capital owing to privatization. 

The case of Italy is particularly clear. Net public wealth was slightly posi¬ 
tive in the 1970s, then turned slightly negative in the 1980s as large govern¬ 
ment deficits mounted. All told, public wealth decreased by an amount equal 
to nearly a year of national income over the period 1970-2010. At the same 


184 












































THE CAPITAL/INCOME RATIO OVER THE LONG RUN 


time, private wealth rose from barely two and a half years of national income 
in 1970 to nearly seven in 2010, an increase of roughly four and a half years. In 
other words, the decrease in public wealth represented between one-fifth and 
one-quarter of the increase in private wealth—a nonnegligible share. Italian 
national wealth did indeed rise significantly, from around two and a half 
years of national income in 1970 to about six in 2010, but this was a smaller 
increase than in private wealth, whose exceptional growth was to some extent 
misleading, since nearly a quarter of it reflected a growing debt that one por¬ 
tion of the Italian population owed to another. Instead of paying taxes to 
balance the government’s budget, the Italians—or at any rate those who had 
the means—lent money to the government by buying government bonds or 
public assets, which increased their private wealth without increasing the na¬ 
tional wealth. 

Indeed, despite a very high rate of private saving (roughly 15 percent of 
national income), national saving in Italy was less than 10 percent of national 
income in the period 1970-2010. In other words, more than a third of private 
saving was absorbed by government deficits. A similar pattern exists in all the 
rich countries, but one generally less extreme than in Italy: in most countries, 
public saving was negative (which means that public investment was less than 
the public deficit: the government invested less than it borrowed or used bor¬ 
rowed money to pay current expenses). In France, Britain, Germany, and the 
United States, government deficits exceeded public investment by 2-3 percent 
of national income on average over the period 1970-2010, compared with more 
than 6 percent in Italy (see Table 5.4). 18 

In all the rich countries, public dissaving and the consequent decrease in 
public wealth accounted for a significant portion of the increase in private 
wealth (between one-tenth and one-quarter, depending on the country). This 
was not the primary reason for the increase in private wealth, but it should 
not be neglected. 

It is possible, moreover, that the available estimates somewhat undervalue 
public assets in the 1970s, especially in Britain (and perhaps Italy and France 
as well), which would lead us to underestimate the magnitude of the transfers 
of public wealth to private hands. 19 If true, this would allow us to explain why 
British private wealth increased so much between 1970 and 2010, despite a 
clearly insufficient private savings rate, and in particular during the waves of 
privatizations of public firms in the 1980s and 1990s, privatizations that often 


185 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


TABLE 5.4. 

Private and public saving in rich countries, 1970-2010 


Country 

National saving 
(private + public) 

(net of depreciation) 

(% national income) 

Private saving (%) 

Public saving (%) 

United States 

5 -i 

7.6 

-2.4 

Japan 

14.6 

14-5 

0.1 

Germany 

10.2 

12.2 

—2.0 

France 

9 - 2 - 

II.I 

-1.9 

Britain 

5-3 

7-3 

—2.0 

Italy 

8.5 

15.0 

-6.5 

Canada 

IO.I 

12.1 

—2.0 

Australia 

8.9 

9.8 

-0.9 


Note-. A large part (variable across countries) of private saving is absorbed by public deficits, so that 
national saving (private + public) is less than private saving. 

Sources-. See piketty.pse.ens.fr/capitalnc. 


involved notoriously low prices, which of course guaranteed that the policy 
would be popular with buyers. 

It is important to note that these transfers of public sector wealth to the 
private sector were not limited to rich countries after 1970—far from it. The 
same general pattern exists on all continents. At the global level, the most ex¬ 
tensive privatization in recent decades, and indeed in the entire history of 
capital, obviously took place in the countries of the former Soviet bloc. 

The highly imperfect estimates available to us indicate that private wealth 
in Russia and the former Eastern bloc countries stood at about four years of 
national income in the late zooos and early 2010s, and net public wealth was 
extremely low, just as in the rich countries. Available estimates for the 1970s 
and 1980s, prior to the fall of the Berlin Wall and the collapse of the Commu¬ 
nist regimes, are even more imperfect, but all signs are that the distribution 
was strictly the opposite: private wealth was insignificant (limited to individ¬ 
ual plots of land and perhaps some housing in the Communist countries least 
averse to private property but in all cases less than a year’s national income), and 
public capital represented the totality of industrial capital and the lion’s share of 


186 





THE CAPITAL/INCOME RATIO OVER THE LONG RUN 


national capital, amounting, as a first approximation, to between three and four 
years of national income. In other words, at first sight, the stock of national 
capital did not change, but the public-private split was totally reversed. 

To sum up: the very considerable growth of private wealth in Russia and 
Eastern Europe between the late 1980s and the present, which led in some 
cases to the spectacularly rapid enrichment of certain individuals (I am think¬ 
ing mainly of the Russian “oligarchs”), obviously had nothing to do with sav¬ 
ing or the dynamic law (3 = s/g. It was purely and simply the result of a transfer 
of ownership of capital from the government to private individuals. The 
privatization of national wealth in the developed countries since 1970 can be 
regarded as a very attenuated form of this extreme case. 

The Historic Rebound of Asset Prices 

The last factor explaining the increase in the capital/income ratio over the 
past few decades is the historic rebound of asset prices. In other words, no 
correct analysis of the period 1970-2010 is possible unless we situate this pe¬ 
riod in the longer historical context of 1910-2010. Complete historical rec¬ 
ords are not available for all developed countries, but the series I have estab¬ 
lished for Britain, France, Germany, and the United States yield consistent 
results, which I summarize below. 

If we look at the whole period 1910-2010, or 1870-2010, we find that the 
global evolution of the capital/income ratio is very well explained by the dy¬ 
namic law (3 —s/g. In particular, the fact that the capital/income ratio is 
structurally higher over the long run in Europe than in the United States is 
perfectly consistent with the differences in the saving rate and especially the 
growth rate over the past century. 20 The decline we see in the period 1910- 
1950 is consistent with low national savings and wartime destruction, and the 
fact that the capital/income ratio rose more rapidly between 1980 and 2010 
than between 1950 and 1980 is well explained by the decrease in the growth 
rate between these two periods. 

Nevertheless, the low point of the 1950s was lower than the simple logic of 
accumulation summed up by the law (3 —slg would have predicted. In order 
to understand the depth of the mid-twentieth-century low, we need to add 
the fact that the price of real estate and stocks fell to historically low levels in 
the aftermath of World War II for any number of reasons (rent control laws, 


187 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


financial regulation, a political climate unfavorable to private capitalism). Af¬ 
ter 1950, these asset prices gradually recovered, with an acceleration after 1980. 

According to my estimates, this historical catch-up process is now com¬ 
plete: leaving aside erratic short-term price movements, the increase in asset 
prices between 1950 and 2010 seems broadly speaking to have compensated 
for the decline between 1910 and 1950. It would be risky to conclude from this 
that the phase of structural asset price increases is definitively over, however, 
and that asset prices will henceforth progress at exactly the same pace as con¬ 
sumer prices. For one thing, the historical sources are incomplete and imper¬ 
fect, and price comparisons over such long periods of time are approximate at 
best. For another, there are many theoretical reasons why asset prices may 
evolve differently from other prices over the long run: for example, some types 
of assets, such as buildings and infrastructure, are affected by technological 
progress at a rate different from those of other parts of the economy. Further¬ 
more, the fact that certain natural resources are nonrenewable can also be 
important. 

Last but not least, it is important to stress that the price of capital, leaving 
aside the perennial short- and medium-term bubbles and possible long-term 
structural divergences, is always in part a social and political construct: it re¬ 
flects each society’s notion of property and depends on the many policies and 
institutions that regulate relations among different social groups, and espe¬ 
cially between those who own capital and those who do not. This is obvious, 
for example, in the case of real estate prices, which depend on laws regulating 
the relations between landlords and tenants and controlling rents. The law 
also affects stock market prices, as I noted when I discussed why stock prices 
in Germany are relatively low. 

In this connection, it is interesting to analyze the ratio between the stock 
market value and the accounting value of firms in the period 1970-2010 in 
those countries for which such data are available (see Figure 5.6). (Readers 
who find these issues too technical can easily skip over the remainder of this 
section and go directly to the next.) 

The market value of a company listed on the stock exchange is its stock 
market capitalization. For companies not so listed, either because they are too 
small or because they choose not to finance themselves via the stock market 
(perhaps in order to preserve family ownership, which can happen even in 
very large firms), the market value is calculated for national accounting pur- 


188 


Ratio between market value and book value 


THE CAPITAL/INCOME RATIO OVER THE LONG RUN 



figure 5.6. Market value and book value of corporations 

Tobin’s Q_ (i.e. the ratio between market value and book value of corporations) has 
risen in rich countries since the 1970S-1980S. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


poses with reference to observed stock prices for listed firms as similar as pos¬ 
sible (in terms of size, sector of activity, and so on) to the unlisted firm, while 
taking into account the “liquidity” of the relevant market. 21 Thus far I have 
used market values to measure stocks of private wealth and national wealth. 
The accounting value of a firm, also called book value or net assets or own 
capital, is equal to the accumulated value of all assets—buildings, infrastruc¬ 
ture, machinery, patents, majority or minority stakes in subsidiaries and other 
firms, vault cash, and so on—included in the firm’s balance sheet, less the to¬ 
tal of all outstanding debt. 

In theory, in the absence of all uncertainty, the market value and book 
value of a firm should be the same, and the ratio of the two should therefore 
be equal to 1 (or 100 percent). This is normally the case when a company is 
created. If the shareholders subscribe to 100 million euros worth of shares, 
which the firm uses to buy offices and equipment worth 100 million euros, 
then the market value and book value will both be equal to 100 million euros. 
The same is true if the firm borrows 50 million euros to buy new machinery 
worth 50 million euros: the net asset value will still be 100 million euros (150 mil¬ 
lion in assets minus 50 million in debt), as will the stock market capitalization. 


189 































THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


The same will be true if the firm earns 50 million in profits and decides to 
create a reserve to finance new investments worth 50 million: the stock price 
will rise by the same amount (because everyone knows that the firm has new 
assets), so that both the market value and the book value will increase to 150 
million. 

The difficulty arises from the fact that anticipating the future of the firm 
quickly becomes more complex and uncertain. After a certain time, for ex¬ 
ample, no one is really sure whether the investment of 50 million euros several 
years earlier is really economically useful to the firm. The book value may 
then diverge from the market value. The firm will continue to list investments— 
in new offices, machinery, infrastructure, patents, and so on—on its balance 
sheet at their market value, so the book value of the firm remains unchanged. 22 
The market value of the firm, that is, its stock market capitalization, may be 
significantly lower or higher, depending on whether financial markets have 
suddenly become more optimistic or pessimistic about the firm’s ability to use 
its investments to generate new business and profits. That is why, in practice, 
one always observes enormous variations in the ratio of the market value to 
the book value of individual firms. This ratio, which is also known as “Tobin’s 
Q” (for the economist James Tobin, who was the first to define it), varied 
from barely 20 percent to more than 340 percent for French firms listed in 
the CAC 40 in 2012. 23 

It is more difficult to understand why Tobin’s Q, when measured for all 
firms in a given country taken together, should be systematically greater or 
smaller than 1. Classically, two explanations have been given. 

If certain immaterial investments (such as expenditures to increase the 
value of a brand or for research and development) are not counted on the bal¬ 
ance sheet, then it is logical for the market value to be structurally greater 
than the book value. This may explain the ratios slightly greater than 1 ob¬ 
served in the United States (100-120 percent) and especially Britain (120- 
140 percent) in the late 1990s and 2000s. But these ratios greater than 1 also 
reflect stock market bubbles in both countries: Tobin’s Qfell rapidly toward 1 
when the Internet bubble burst in 2001-2002 and in the financial crisis of 
2008-2009 (see Figure 5 .6). 

Conversely, if the stockholders of a company do not have full control, say, 
because they have to compromise in a long-term relationship with other 
“stakeholders” (such as worker representatives, local or national governments, 


190 


THE CAPITAL/INCOME RATIO OVER THE LONG RUN 


consumer groups, and so on), as we saw earlier is the case in “Rhenish capital¬ 
ism,” then it is logical that the market value should be structurally less than 
the book value. This may explain the ratios slightly below one observed in 
France (around 80 percent) and especially Germany and Japan (around 50- 
70 percent) in the 1990s and 2000s, when English and US firms were at or 
above 100 percent (see Figure 5.6). Note, too, that stock market capitalization 
is calculated on the basis of prices observed in current stock transactions, 
which generally correspond to buyers seeking small minority positions and 
not buyers seeking to take control of the firm. In the latter case, it is common 
to pay a price significantly higher than the current market price, typically 
on the order of 20 percent higher. This difference may be enough to explain a 
Tobin’s Q of around 80 percent, even when there are no stakeholders other 
than minority shareholders. 

Leaving aside these interesting international variations, which reflect the 
fact that the price of capital always depends on national rules and institu¬ 
tions, one can note a general tendency for Tobin’s Q to increase in the rich 
countries since 1970. This is a consequence of the historic rebound of asset 
prices. All told, if we take account of both higher stock prices and higher real 
estate prices, we can say that the rebound in asset prices accounts for one-quarter 
to one-third of the increase in the ratio of national capital to national income 
in the rich countries between 1970 and 2010 (with large variations between 
countries). 24 

National Capital and Net Foreign Assets in the Rich Countries 

As noted, the enormous amounts of foreign assets held by the rich countries, 
especially Britain and France, on the eve of World War I totally disappeared 
following the shocks of 1914-1945, and net foreign asset positions have never 
returned to their previous high levels. In fact, if we look at the levels of na¬ 
tional capital and net foreign capital in the rich countries between 1970 and 
2010, it is tempting to conclude that foreign assets were of limited importance. 
The net foreign asset position is sometimes slightly positive and sometimes 
slightly negative, depending on the country and the year, but the balance is 
generally fairly small compared with total national capital. In other words, 
the sharp increase in the level of national capital in the rich countries reflects 
mainly the increase of domestic capital, and to a first approximation net 


191 


Value of capital (% national income) 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


800% 

700% 

600% 

500% 

400% 

300% 

100% 

100% 

0% 

-100% 

1970 1975 1980 1985 1990 1995 zooo 1005 1010 

FIGURE 5.7. National capital in rich countries, 1970-2010 

Net foreign assets held by Japan and Germany are worth between 0.5 and one year of 
national income in 2010. 

Sources and series: see piketty.pse.ens.fr/capital21c. 

foreign assets would seem to have played only a relatively minor role (see 
Figure 5.7). 

This conclusion is not quite accurate, however. For example, Japan and 
Germany have accumulated quite significant quantities of net foreign assets 
over the past few decades, especially in the 2000s (largely as an automatic 
consequence of their trade surpluses). In the early 2010s, Japan’s net foreign 
assets totaled about 70 percent of national income, and Germany’s amounted 
to nearly 50 percent. To be sure, these amounts are still substantially lower 
than the net foreign assets of Britain and France on the eve of World War I 
(nearly two years of national income for Britain and more than one for 
France). Given the rapid pace of accumulation, however, it is natural to ask 
whether this will continue. 25 To what extent will some countries find them¬ 
selves owned by other countries over the course of the twenty-first century? 
Are the substantial net foreign asset positions observed in the colonial era 
likely to return or even to be surpassed? 

To deal correctly with this question, we need to bring the petroleum ex¬ 
porting countries and emerging economies (starting with China) back into 
the analysis. Although historical data concerning these countries is limited 



192 














































THE CAPITAL/INCOME RATIO OVER THE LONG RUN 


(which is why I have not discussed them much to this point), our sources for 
the current period are much more satisfactory. We must also consider ine¬ 
quality within and not just between countries. I therefore defer this question, 
which concerns the dynamics of the global distribution of capital, to Part 
Three. 

At this stage, I note simply that the logic of the law (3 =s/g can automati¬ 
cally give rise to very large international capital imbalances, as the Japanese 
case clearly illustrates. For a given level of development, slight differences in 
growth rates (particularly demographic growth rates) or savings rates can 
leave some countries with a much higher capital/income ratio than others, in 
which case it is natural to expect that the former will invest massively in the 
latter. This can create serious political tensions. The Japanese case also indi¬ 
cates a second type of risk, which can arise when the equilibrium capital/in- 
come ratio (3 —slg rises to a very high level. If the residents of the country in 
question strongly prefer domestic assets—say, Japanese real estate—this can 
drive the price of those preferred assets to unprecedentedly high levels. In this 
respect, it is interesting to note that the Japanese record of 1990 was recently 
beaten by Spain, where the total amount of net private capital reached eight 
years of national income on the eve of the crisis of 2007-2008, which is a year 
more than in Japan in 1990. The Spanish bubble began to shrink quite rapidly 
in 2010-2011, just as the Japanese bubble did in the early 1990s. 26 It is quite 
possible that even more spectacular bubbles will form in the future, as the 
potential capital/income ratio (3 —slg rises to new heights. In passing, note 
how useful it is to represent the historical evolution of the capital/income ra¬ 
tio in this way and thus to exploit stocks and flows in the national accounts. 
Doing so might make it possible to detect obvious overvaluations in time to 
apply prudential policies and financial regulations designed to temper the 
speculative enthusiasm of financial institutions in the relevant countries. 27 

One should also note that small net positions may hide enormous gross 
positions. Indeed, one characteristic of today’s financial globalization is that 
every country is to a large extent owned by other countries, which not only 
distorts perceptions of the global distribution of wealth but also represents an 
important vulnerability for smaller countries as well as a source of instability 
in the global distribution of net positions. Broadly speaking, the 1970s and 
1980s witnessed an extensive “financialization” of the global economy, which 
altered the structure of wealth in the sense that the total amount of financial 


193 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


assets and liabilities held by various sectors (households, corporations, gov¬ 
ernment agencies) increased more rapidly than net wealth. In most countries, 
the total amount of financial assets and liabilities in the early 1970s did not 
exceed four to five years of national income. By 2010, this amount had in¬ 
creased to ten to fifteen years of national income (in the United States, Japan, 
Germany, and France in particular) and to twenty years of national income 
in Britain, which set an absolute historical record. 28 This reflects the unpre¬ 
cedented development of cross-investments involving financial and non- 
financial corporations in the same country (and, in particular, a signifi¬ 
cant inflation of bank balance sheets, completely out of proportion with 
the growth of the banks’ own capital), as well as cross-investments between 
countries. 

In this respect, note that the phenomenon of international cross-investments 
is much more prevalent in European countries, led by Britain, Germany, and 
France (where financial assets held by other countries represent between one- 
quarter and one-half of total domestic financial assets, which is considerable), 
than in larger economies such as the United States and Japan (where the 
proportion of foreign-held assets is not much more than one-tenth). 29 This 
increases the feeling of dispossession, especially in Europe, in part for good 
reasons, though often to an exaggerated degree. (People quickly forget that 
while domestic companies and government debt are largely owned by the rest 
of the world, residents hold equivalent assets abroad through annuities and 
other financial products.) Indeed, balance sheets structured in this way sub¬ 
ject small countries, especially in Europe, to an important vulnerability, in 
that small “errors” in the valuation of financial assets and liabilities can lead 
to enormous variations in the net foreign asset position. 30 Furthermore, the 
evolution of a country’s net foreign asset position is determined not only by 
the accumulation of trade surpluses or deficits but also by very large variations 
in the return on the country’s financial assets and liabilities. 31 I should also 
point out that these international positions are in substantial part the result 
of fictitious financial flows associated not with the needs of the real economy 
but rather with tax optimization strategies and regulatory arbitrage (using 
screen corporations set up in countries where the tax structure and/or regula¬ 
tory environment is particularly attractive). 32 I come back to these questions 
in Part Three, where I will examine the importance of tax havens in the global 
dynamics of wealth distribution. 


194 


THE CAPITAL/INCOME RATIO OVER THE LONG RUN 


What Will the Capital/Income Ratio Be in the 
Twenty-First Century? 

The dynamic law §=s/g also enables us to think about what level the global 
capital/income ratio might attain in the twenty-first century. 

First consider what we can say about the past. Concerning Europe (or at 
any rate the leading economies of Western Europe) and North America, we 
have reliable estimates for the entire period 1870-2010. For Japan, we have no 
comprehensive estimate of total private or national wealth prior to i960, but 
the incomplete data we do have, in particular Japanese probate records going 
back to 1905, clearly show that Japanese wealth can be described by the same 
type of “U-curve” as in Europe, and that the capital/income ratio in the pe¬ 
riod 1910-1930 rose quite high, to 600-700 percent, before falling to just 
200-300 percent in the 1930s and 1960s and then rebounding spectacularly 
to levels again close to 600-700 percent in the 1990s and 2000s. 

For other countries and continents, including Asia (apart from Japan), 
Africa, and South America, relatively complete estimates exist from 1990 on, 
and these show a capital/income ratio of about four years on average. For the 
period 1870-1990 there are no truly reliable estimates, and I have simply as¬ 
sumed that the overall level was about the same. Since these countries account 
for just over a fifth of global output throughout this period, their impact on 
the global capital/income ratio is in any case fairly limited. 

The results I have obtained are shown in Figure 5.8. Given the weight of 
the rich countries in this total, it comes as no surprise to discover that the 
global capital/income ratio followed the same type of “U-curve”: it seems to¬ 
day to be close to 300 percent, which is roughly the same level as that attained 
on the eve of World War F 

The most interesting question concerns the extrapolation of this curve 
into the future. Here I have used the demographic and economic growth pre¬ 
dictions presented in Chapter 2, according to which global output will gradu¬ 
ally decline from the current 3 percent a year to just 1.5 percent in the second 
half of the twenty-first century. I also assume that the savings rate will stabi¬ 
lize at about 10 percent in the long run. With these assumptions, the dynamic 
law §=s/g implies that the global capital/income ratio will quite logically 
continue to rise and could approach 700 percent before the end of the 
twenty-first century, or approximately the level observed in Europe from 


195 


Value of private capital (% national income) 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 



figure 5.8. The world capital/income ratio, 1870-2100 

According to simulations (central scenario), the world capital/income ratio could be 
close to 700 percent by the end of the twenty-first century. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


the eighteenth century to the Belle Epoque. In other words, by 2100, the en¬ 
tire planet could look like Europe at the turn of the twentieth century, at least 
in terms of capital intensity. Obviously, this is just one possibility among oth¬ 
ers. As noted, these growth predictions are extremely uncertain, as is the pre¬ 
diction of the rate of saving. These simulations are nevertheless plausible and 
valuable as a way of illustrating the crucial role of slower growth in the accu¬ 
mulation of capital. 


The Mystery of Land Values 

By definition, the law (3 =5 /^applies only to those forms of capital that can 
be accumulated. It does not take account of the value of pure natural re¬ 
sources, including “pure land,” that is, land prior to any human improve¬ 
ments. The fact that the law |3 = s /g al lows us to explain nearly the entirety of 
the observed capital stock in 2010 (between 80 and 100 percent, depending 
on the country) suggests that pure land constitutes only a small part of na¬ 
tional capital. But exactly how much? The available data are insufficient to 
give a precise answer to this question. 


196 







































THE CAPITAL/INCOME RATIO OVER THE LONG RUN 


Consider first the case of farmland in a traditional rural society. It is very 
difficult to say precisely what portion of its value represents “pure land value” 
prior to any human exploitation and what corresponds to the many investments 
in and improvements to this land over the centuries (including clearing, drain¬ 
age, fencing, and so on). In the eighteenth century, the value of farmland in 
France and Britain attained the equivalent of four years of national income. 33 
According to contemporary estimates, investments and improvements repre¬ 
sented at least three-quarters of this value and probably more. The value of 
pure land represented at most one year of national income, and probably less 
than half a year. This conclusion follows primarily from the fact that the an¬ 
nual value of the labor required to clear, drain, and otherwise improve the 
land was considerable, on the order of 3-4 percent of national income. With 
relatively slow growth, less than 1 percent a year, the cumulative value of 
such investments was undoubtedly close to the total value of the land (if not 
greater). 34 

It is interesting that Thomas Paine, in his famous “Agrarian Justice” pro¬ 
posal to French legislators in 1795, also concluded that “unimproved land” 
accounted for roughly one-tenth of national wealth, or a little more than half 
a year of national income. 

Nevertheless, estimates of this sort are inevitably highly approximate. 
When the growth rate is low, small variations in the rate of investment pro¬ 
duce enormous differences in the long-run value of the capital/income ratio 
(3 = s /g. The key point to remember is that even in a traditional society, the 
bulk of national capital already stemmed from accumulation and investment: 
nothing has really changed, except perhaps the fact that the depreciation of 
land was quite small compared with that of modern real estate or business 
capital, which has to be repaired or replaced much more frequently. This may 
contribute to the impression that modern capital is more “dynamic.” But 
since the data we have concerning investment in traditional rural societies are 
limited and imprecise, it is difficult to say more. 

In particular, it seems impossible to compare in any precise way the value 
of pure land long ago with its value today. The principal issue today is urban 
land: farmland is worth less than 10 percent of national income in both 
France and Britain. But it is no easier to measure the value of pure urban land 
today, independent not only of buildings and construction but also of infra¬ 
structure and other improvements needed to make the land attractive, than 


197 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


to measure the value of pure farmland in the eighteenth century. According 
to my estimates, the annual flow of investment over the past few decades can 
account for almost all the value of wealth, including wealth in real estate, in 
2010. In other words, the rise in the capital/income ratio cannot be explained 
in terms of an increase in the value of pure urban land, which to a first ap¬ 
proximation seems fairly comparable to the value of pure farmland in the 
eighteenth century: half to one year of national income. The margin of uncer¬ 
tainty is nevertheless substantial. 

Two further points are worth mentioning. First, the fact that total capital, 
especially in real estate, in the rich countries can be explained fairly well in 
terms of the accumulation of flows of saving and investment obviously does 
not preclude the existence of large local capital gains linked to the concen¬ 
tration of population in particular areas, such as major capitals. It would not 
make much sense to explain the increase in the value of buildings on the 
Champs-Elysees or, for that matter, anywhere in Paris exclusively in terms of 
investment flows. Our estimates suggest, however, that these large capital 
gains on real estate in certain areas were largely compensated by capital losses 
in other areas, which became less attractive, such as smaller cities or decaying 
neighborhoods. 

Second, the fact that the increase in the value of pure land does not seem 
to explain much of the historic rebound of the capital/income ration in the 
rich countries in no way implies that this will continue to be true in the fu¬ 
ture. From a theoretical point of view, there is nothing that guarantees long¬ 
term stability of the value of land, much less of all natural resources. I will 
come back to this point when I analyze the dynamics of wealth and foreign 
asset holdings in the petroleum exporting countries. 35 


198 


{SIX} 


The Capital-Labor Split in the 
Twenty-First Century 


We now have a fairly good understanding of the dynamics of the capital/income 
ratio, as described by the law (3 =s/g. In particular, the long-run capital/income 
ratio depends on the savings rate r and the growth rateg These two macrosocial 
parameters themselves depend on millions of individual decisions influenced 
by any number of social, economic, cultural, psychological, and demographic 
factors and may vary considerably from period to period and country to coun¬ 
try. Furthermore, they are largely independent of each other. These facts 
enable us to understand the wide historical and geographic variations in the 
capital/income ratio, independent of the fact that the relative price of capital 
can also vary widely over the long term as well as the short term, as can the 
relative price of natural resources. 

From the Capital/Income Ratio to the Capital-Labor Split 

I turn now from the analysis of the capital/income ratio to the division of 
national income between labor and capital. The formula a = r X ( 3 , which in 
Chapter i I called the first fundamental law of capitalism, allows us to move 
transparently between the two. For example, if the capital stock is equal to six 
years of national income ((3 = 6), and if the average return on capital is 5 per¬ 
cent a year (r= 5%), then the share of income from capital, a, in national in¬ 
come is 30 percent (and the share of income front labor is therefore 70 per¬ 
cent). Hence the central question is the following: How is the rate of return 
on capital determined? I shall begin by briefly examining the evolutions ob¬ 
served over the very long run before analyzing the theoretical mechanisms 
and economic and social forces that come into play. 

The two countries for which we have the most complete historical data 
from the eighteenth century on are once again Britain and France. 


199 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 



figure 6.1. The capital-labor split in Britain, 1770-2010 

During the nineteenth century, capital income (rent, profits, dividends, interest...) 
absorbed about 40 percent of national income versus 60 percent for labor income (in¬ 
cluding both wage and non-wage income). 

Sources and series: see piketty.pse.ens.fr/capital21c. 


We find that the general evolution of capital’s share of income, a, is de¬ 
scribed by the same U-shaped curve as the capital/income ratio, ( 3 , although 
the depth of the U is less pronounced. In other words, the rate of return on 
capital, r, seems to have attenuated the evolution of the quantity of capital, ( 3 : r 
is higher in periods when (3 is lower, and vice versa, which seems natural. 

More precisely: we find that capital’s share of income was on the order of 
35-40 percent in both Britain and France in the late eighteenth century and 
throughout the nineteenth, before falling to 20-25 percent in the middle of 
the twentieth century and then rising again to 25-30 percent in the late twen¬ 
tieth and early twenty-first centuries (see Figures 6.1 and 6.2). This corre¬ 
sponds to an average rate of return on capital of around 5-6 percent in the 
eighteenth and nineteenth centuries, rising to 7-8 percent in the mid-twentieth 
century, and then falling to 4-5 percent in the late twentieth and early twenty- 
first centuries (see Figures 6 .3 and 6.4). 

The overall curve and the orders of magnitude described here may be taken 
as reliable and significant, at least to a first approximation. Nevertheless, the 
limitations and weaknesses of the data should be noted immediately. First, as 


200 








































THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 



FIGURE 6.2. The capital-labor split in France, 1820-2010 

In the twenty-first century, capital income (rent, profits, dividends, interest...) ab¬ 
sorbs about 30 percent of national income versus 70 percent for labor income (includ¬ 
ing both wage and non-wage income). 

Sources and series: see piketty.pse.ens.fr/capital21c. 

noted, the very notion of an “average” rate of return on capital is a fairly ab¬ 
stract construct. In practice, the rate of return varies widely with the type of 
asset, as well as with the size of individual fortunes (it is generally easier to 
obtain a good return if one begins with a large stock of capital), and this tends 
to amplify inequalities. Concretely, the yield on the riskiest assets, including 
industrial capital (whether in the form of partnerships in family firms in the 
nineteenth century or shares of stock in listed corporations in the twentieth 
century), is often greater than 7-8 percent, whereas the yield on less risky assets 
is significantly lower, on the order of 4-5 percent for farmland in the eighteenth 
and nineteenth centuries and as low as 3-4 percent for real estate in the early 
twenty-first century. Small nest eggs held in checking or savings accounts often 
yield a real rate of return closer to 1-2 percent or even less, perhaps even nega¬ 
tive, when the inflation rate exceeds the meager nominal interest rate on such 
accounts. This is a crucial issue about which I will have more to say later on. 

At this stage it is important to point out that the capital shares and aver¬ 
age rates of return indicated in Figures 6.1-4 were calculated by adding the 
various amounts of income from capital included in national accounts, re¬ 
gardless of legal classification (rents, profits, dividends, interest, royalties, etc., 


201 


































THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 



FIGURE 6.3. The pure rate of return on capital in Britain, 1770-2010 

The pure rate of return to capital is roughly stable around 4-5 percent in the long run. 

Sources and series: see piketty.pse.ens.fr/capital21c. 



FIGURE 6.4. The pure rate of return on capital in France, 1820-2010 

The observed average rate of return displays larger fluctuations than the pure rate of 
return during the twentieth century. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


202 































































THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 


excluding interest on public debt and before taxes) and then dividing this to¬ 
tal by national income (which gives the share of capital income in national 
income, denoted a) or by the national capital stock (which gives the average 
rate of return on capital, denoted r). 1 By construction, this average rate of re¬ 
turn aggregates the returns on very different types of assets and investments: 
the goal is in fact to measure the average return on capital in a given society 
taken as a whole, ignoring differences in individual situations. Obviously 
some people earn more than the average return and others less. Before look¬ 
ing at the distribution of individual returns around the mean, it is natural to 
begin by analyzing the location of the mean. 

Flows: More Difficult to Estimate Than Stocks 

Another important caveat concerns the income of nonwage workers, which 
may include remuneration of capital that is difficult to distinguish from other 
income. 

To be sure, this problem is less important now than in the past because most 
private economic activity today is organized around corporations or, more gen¬ 
erally, joint-stock companies, so a firm’s accounts are clearly separate from the 
accounts of the individuals who supply the capital (who risk only the capital 
they have invested and not their personal fortunes, thanks to the revolutionary 
concept of the “limited liability corporation,” which was adopted almost every¬ 
where in the latter half of the nineteenth century). On the books of such a cor¬ 
poration, there is a clear distinction between remuneration of labor (wages, 
salaries, bonuses, and other payments to employees, including managers, who 
contribute labor to the company’s activities) and remuneration of capital (divi¬ 
dends, interest, profits reinvested to increase the value of the firm’s capital, etc.). 

Partnerships and sole proprietorships are different: the accounts of the 
business are sometimes mingled with the personal accounts of the firm head, 
who is often both the owner and operator. Today, around io percent of domes¬ 
tic production in the rich countries is due to nonwage workers in individually 
owned businesses, which is roughly equal to the proportion of nonwage work¬ 
ers in the active population. Nonwage workers are mostly found in small 
businesses (merchants, craftsmen, restaurant workers, etc.) and in the pro¬ 
fessions (doctors, lawyers, etc.). For a long time this category also included a 
large number of independent farmers, but today these have largely disappeared. 


203 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


On the books of these individually owned firms, it is generally impossible to 
distinguish the remuneration of capital: for example, the profits of a radiolo¬ 
gist remunerate both her labor and the equipment she uses, which can be 
costly. The same is true of the hotel owner or small farmer. We therefore say 
that the income of nonwage workers is “mixed,” because it combines income 
from labor with income from capital. This is also referred to as “entrepreneur¬ 
ial income.” 

To apportion mixed incomes between capital and labor, I have used the 
same average capital-labor split as for the rest of the economy. This is the least 
arbitrary choice, and it appears to yield results close to those obtained with 
the other two commonly used methods. 2 It remains an approximation, how¬ 
ever, since the very notion of a clear boundary between income from capital 
and income from labor is not clearly defined for mixed incomes. For the cur¬ 
rent period, this makes virtually no difference: because the share of mixed 
income in national income is small, the uncertainty about capital’s share of 
mixed income affects no more than 1-1 percent of national income. In earlier 
periods, and especially for the eighteenth and nineteenth centuries when 
mixed incomes may have accounted for more than half of national income, 
the uncertainties are potentially much greater. 3 That is why available esti¬ 
mates of the capital share for the eighteenth and nineteenth centuries can 
only be counted as approximations. 4 

Despite these caveats, my estimates for capital’s share of national income 
in this period (at least 40 percent) appear to be valid: in both Britain and 
France, the rents paid to landlords alone accounted for 2.0 percent of national 
income in the eighteenth and early nineteenth centuries, and all signs are that 
the return on farmland (which accounted for about half of national capital) 
was slightly less than the average return on capital and significantly less than 
the return on industrial capital, to judge by the very high level of industrial 
profits, especially during the first half of the nineteenth century. Because of 
imperfections in the available data, however, it is better to give an interval— 
between 35 and 40 percent—than a single estimate. 

For the eighteenth and nineteenth centuries, estimates of the value of the 
capital stock are probably more accurate than estimates of the flows of income 
from labor and capital. This remains largely true today. That is why I chose to 
emphasize the evolution of the capital/income ratio rather than the capital- 
labor split, as most economic researchers have done in the past. 


204 


THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 


The Notion of the Pure Return on Capital 

The other important source of uncertainties, which leads me to think that the 
average rates of return indicated in Figures 6.3 and 6.4 are somewhat overesti¬ 
mated, so that I also indicate what might be called the “pure” rate of return 
on capital, is the fact that national accounts do not allow for the labor, or at any 
rate attention, that is required of anyone who wishes to invest. To be sure, the 
cost of managing capital and of “formal” financial intermediation (that is, the 
investment advice and portfolio management services provided by a bank or 
official financial institution or real estate agency or managing partner) is obvi¬ 
ously taken into account and deducted from the income on capital in calculat¬ 
ing the average rate of return (as presented here). But this is not the case with 
“informal” financial intermediation: every investor spends time—in some cases 
a lot of time—managing his own portfolio and affairs and determining which 
investments are likely to be the most profitable. This effort can in certain cases 
be compared to genuine entrepreneurial labor or to a form of business activity. 

It is of course quite difficult—and to some extent arbitrary—to calculate 
the value of this informal labor in any precise way, which explains why it is 
omitted front national accounts. In theory, one would have to measure the 
time spent on investment-related activities and ascribe an hourly value to that 
time, based perhaps on the remuneration of equivalent labor in the formal fi¬ 
nancial or real estate sector. One might also imagine that these informal costs 
are greater in periods of very rapid economic growth (or high inflation), for 
such times are likely to require more frequent reallocation of investments and 
more time researching the best investment opportunities than in a quasi- 
stagnant economy. For example, it is difficult to believe that the average re¬ 
turns on capital of close to 10 percent that we observe in France (and to a lesser 
degree in Britain) during periods of postwar reconstruction are simply pure 
returns on capital. It is likely that such high returns also include a nonnegligible 
portion of remuneration for informal entrepreneurial labor. (Similar returns 
are also observed in emerging economies such as China today, where growth 
rates are also very rapid.) 

For illustrative purposes, I have indicated in Figures 6.3 and 6.4 my esti¬ 
mates of the pure return on capital in Britain and France at various times. 
I obtained these estimates by deducting from the observed average return 
a plausible (although perhaps too high) estimate of the informal costs of 


205 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


portfolio management (that is, the value of the time spent managing one’s 
wealth). The pure rates of return obtained in this way are generally on the order 
of one or two percentage points lower than the observed returns and should 
probably be regarded as minimum values. 5 In particular, the available data on 
the rates of return earned by fortunes of different sizes suggest that there are 
important economies of scale in the management of wealth, and that the 
pure returns earned by the largest fortunes are significantly higher than 
the levels indicated here. 6 

The Return on Capital in Historical Perspective 

The principal conclusion that emerges from my estimates is the following. In 
both France and Britain, from the eighteenth century to the twenty-first, the 
pure return on capital has oscillated around a central value of 4-5 percent a 
year, or more generally in an interval from 3-6 percent a year. There has been 
no pronounced long-term trend either upward or downward. The pure return 
rose significantly above 6 percent following the massive destruction of prop¬ 
erty and numerous shocks to capital in the two world wars but subsequently 
returned fairly rapidly to the lower levels observed in the past. It is possible, 
however, that the pure return on capital has decreased slightly over the very long 
run: it often exceeded 4-5 percent in the eighteenth and nineteenth centuries, 
whereas in the early twenty-first century it seems to be approaching 3-4 percent 
as the capital/income ratio returns to the high levels observed in the past. 

We nevertheless lack the distance needed to be certain about this last 
point. We cannot rule out the possibility that the pure return on capital will 
rise to higher levels over the next few decades, especially in view of the grow¬ 
ing international competition for capital and the equally increasing sophisti¬ 
cation of financial markets and institutions in generating high yields from 
complex, diversified portfolios. 

In any case, this virtual stability of the pure return on capital over the very 
long run (or more likely this slight decrease of about one-quarter to one-fifth, 
from 4-5 percent in the eighteenth and nineteenth centuries to 3-4 percent 
today) is a fact of major importance for this study. 

In order to put these figures in perspective, recall first of all that the tradi¬ 
tional rate of conversion from capital to rent in the eighteenth and nineteenth 
centuries, for the most common and least risky forms of capital (typically 


206 


THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 


land and public debt) was generally on the order of 5 percent a year: the value 
of a capital asset was estimated to be equal to twenty years of the annual in¬ 
come yielded by that asset. Sometimes this was increased to twenty-five years 
(corresponding to a return of 4 percent a year). 7 

In classic novels of the early nineteenth century, such as those of Balzac 
and Jane Austen, the equivalence between capital and rent at a rate of 5 percent 
(or more rarely 4 percent) is taken for granted. Novelists frequently failed to 
mention the nature of the capital and generally treated land and public debt 
as almost perfect substitutes, mentioning only the yield in rent. We are told, 
for example, that a major character has 50,000 francs or 2,000 pounds ster¬ 
ling of rent but not whether it comes from land or from government bonds. It 
made no difference, since in both cases the income was certain and steady and 
sufficient to finance a very definite lifestyle and to reproduce across genera¬ 
tions a familiar and well-understood social status. 

Similarly, neither Austen nor Balzac felt it necessary to specify the rate of 
return needed to transform a specific amount of capital into an annual rent: 
every reader knew full well that it took a capital on the order of 1 million francs 
to produce an annual rent of 50,000 francs (or a capital of 40,000 pounds to 
produce an income of 2,000 pounds a year), no matter whether the investment 
was in government bonds or land or something else entirely. For nineteenth- 
century novelists and their readers, the equivalence between wealth and annual 
rent was obvious, and there was no difficulty in moving from one measuring 
scale to the other, as if the two were perfectly synonymous. 

It was also obvious to novelists and their readers that some kinds of in¬ 
vestment required greater personal involvement, whether it was Pere Goriot’s 
pasta factories or Sir Thomas’s plantations in the West Indies in Mansfield 
Park. What is more, the return on such investments was naturally higher, 
typically on the order of 7-8 percent or even more if one struck an especially 
good bargain, as Cesar Birotteau hoped to do by investing in real estate in the 
Madeleine district of Paris after earlier successes in the perfume business. But 
it was also perfectly clear to everyone that when the time and energy devoted 
to organizing such affairs was deducted from the profits (think of the long 
months that Sir Thomas is forced to spend in the West Indies), the pure re¬ 
turn obtained in the end was not always much more than the 4-5 percent 
earned by investments in land and government bonds. In other words, the 
additional yield was largely remuneration for the labor devoted to the business, 


207 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


and the pure return on capital, including the risk premium, was generally not 
much above 4-5 percent (which was not in any case a bad rate of return). 

The Return on Capital in the Early Twenty-First Century 

How is the pure return on capital determined (that is, what is the annual re¬ 
turn on capital after deducting all management costs, including the value of 
the time spent in portfolio management) ? Why did it decrease over the long 
run from roughly 4-5 percent in the age of Balzac and Austen to roughly 3-4 
percent today? 

Before attempting to answer these questions, another important issue needs 
to be clarified. Some readers may find the assertion that the average return on 
capital today is 3-4 percent quite optimistic in view of the paltry return that 
they obtain on their meager savings. A number of points need to be made. 

First, the returns indicated in Figures 6.3 and 6.4 are pretax returns. In 
other words, they are the returns that capital would earn if there were no 
taxes on capital or income. In Part Four I will consider the role such taxes 
have played in the past and may play in the future as fiscal competition be¬ 
tween states increases. At this stage, let me say simply that fiscal pressure was 
virtually nonexistent in the eighteenth and nineteenth centuries. It was 
sharply higher in the twentieth century and remains higher today, so that the 
average after-tax return on capital has decreased much more over the long run 
than the average pretax return. Today, the level of taxation of capital and its 
income may be fairly low if one adopts the correct strategy of fiscal optimiza¬ 
tion (and some particularly persuasive investors even manage to obtain subsi¬ 
dies), but in most cases the tax is substantial. In particular, it is important to 
remember that there are many taxes other than income tax to consider: for 
instance, real estate taxes cut into the return on investments in real estate, and 
corporate taxes do the same for the income on financial capital invested in 
firms. Only if all these taxes were eliminated (as may happen someday, but we 
are still a long way from that) that the returns on capital actually accruing to 
its owners would reach the levels indicated in Figures 6.3 and 6.4. When all 
taxes are taken into account, the average tax rate on income from capital is 
currently around 30 percent in most of the rich countries. This is the primary 
reason for the large gap between the pure economic return on capital and the 
return actually accruing to individual owners. 


208 


THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 


The second important point to keep in mind is that a pure return of 
around 3-4 percent is an average that hides enormous disparities. For indi¬ 
viduals whose only capital is a small balance in a checking account, the return 
is negative, because such balances yield no interest and are eaten away by infla¬ 
tion. Savings accounts often yield little more than the inflation rate. 8 But the 
important point is that even if there are many such individuals, their total 
wealth is relatively small. Recall that wealth in the rich countries is currently 
divided into two approximately equal (or comparable) parts: real estate and 
financial assets. Nearly all financial assets are accounted for by stocks, bonds, 
mutual funds, and long-term financial contracts such as annuities or pension 
funds. Non-interest-bearing checking accounts currently represent only about 
10-20 percent of national income, or at most 3-4 percent of total wealth (which, 
as readers will recall, is 500-600 percent of national income). If we add sav¬ 
ings accounts, we increase the total to just above 30 percent of national in¬ 
come, or barely more than 5 percent of total wealth. 9 The fact that checking 
and savings accounts yield only very meager interest is obviously of some con¬ 
cern to depositors, but in terms of the average return on capital, this fact is 
not very important. 

In regard to average return, it is far more important to observe that the 
annual rental value of housing, which accounts for half of total national 
wealth, is generally 3-4 percent of the value of the property. For example, an 
apartment worth 500,000 euros will yield rent of 15,000-20,000 euros per 
year (or about 1,500 euros per month). Those who prefer to own their prop¬ 
erty can save that amount in rent. This is also true for more modest housing: 
an apartment worth 100,000 euros yields 3,000-4,000 euros of rent a year 
(or allows the owner to avoid paying that amount). And, as noted, the rental 
yield on small apartments is as high as 5 percent. The returns on financial in¬ 
vestments, which are the predominant asset in larger fortunes, are higher still. 
Taken together, it is these kinds of investments, in real estate and financial 
instruments, that account for the bulk of private wealth, and this raises the 
average rate of return. 


Real and Nominal Assets 

The third point that needs to be clarified is that the rates of return indicated 
in Figures 6.3 and 6.4 are real rates of return. In other words, it would be a 


209 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


serious mistake to try to deduce the rate of inflation (typically 1-2 percent in 
the rich countries today) from these yields. 

The reason is simple and was touched on earlier: the lion’s share of household 
wealth consists of “real assets” (that is, assets directly related to a real economic 
activity, such as a house or shares in a corporation, the price of which there¬ 
fore evolves as the related activity evolves) rather than “nominal assets” 
(that is, assets whose value is fixed at a nominal initial value, such as a sum of 
money deposited in a checking or savings account or invested in a govern¬ 
ment bond that is not indexed to inflation). 

Nominal assets are subject to a substantial inflation risk: if you invest 
10,000 euros in a checking or savings account or a nonindexed government or 
corporate bond, that investment is still worth 10,000 euros ten years later, 
even if consumer prices have doubled in the meantime. In that case, we say 
that the real value of the investment has fallen by half: you can buy only half 
as much in goods and services as you could have bought with the initial in¬ 
vestment, so that your return after ten years is —50 percent, which may or may 
not have been compensated by the interest you earned in the interim. In peri¬ 
ods during which prices are rising sharply, the “nominal” rate of interest, that 
is, the rate of interest prior to deduction of the inflation rate, will rise to a 
high level, usually greater than the inflation rate. But the investor’s results de¬ 
pend on when the investment was made, how the parties to the transaction 
anticipated future inflation at that point in time, and so on: the “real” interest 
rate, that is, the return actually obtained after inflation has been deducted, 
may be significantly negative or significantly positive, depending on the case. 10 
In any case, the inflation rate must be deducted from the interest rate if one 
wants to know the real return on a nominal asset. 

With real assets, everything is different. The price of real estate, like the 
price of shares of stock or parts of a company or investments in a mutual 
fund, generally rises at least as rapidly as the consumer price index. In other 
words, not only must we not subtract inflation from the annual rents or divi¬ 
dends received on such assets, but we often need to add to the annual re¬ 
turn the capital gains earned when the asset is sold (or subtract the capital 
loss, as the case may be). The crucial point is that real assets are far more 
representative than nominal assets: they generally account for more than 
three-quarters of total household assets and in some cases as much as 
nine-tenths. 11 


210 


THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 


When I examined the accumulation of capital in Chapter 5 ,1 concluded 
that these various effects tend to balance out over the long run. Concretely, if 
we look at all assets over the period 1910-2010, we find that their average price 
seems to have increased at about the same rate as the consumer price index, at 
least to a first approximation. To be sure, there may have been large capital 
gains or losses for a given category of assets (and nominal assets, in particular, 
generate capital losses, which are compensated by capital gains on real assets), 
which vary greatly from period to period: the relative price of capital de¬ 
creased sharply in the period 1910-1950 before trending upward between 1950 
and 2010. Under these conditions, the most reasonable approach is to take the 
view that the average returns on capital indicated in Figures 6.3 and 6 . 4, 
which I obtained by dividing the annual flow of income on capital (from 
rents, dividends, interest, profits, etc.) by the stock of capital, thus neglecting 
both capital gains and capital losses, is a good estimate of the average return 
on capital over the long run. 12 Of course, this does not mean that when we 
study the yield of a particular asset we need not add any capital gain or sub¬ 
tract any capital loss (and, in particular, deduct inflation in the case of a 
nominal asset). But it would not make much sense to deduct inflation from 
the return on all forms of capital without adding capital gains, which on aver¬ 
age amply make up for the effects of inflation. 

Make no mistake: I am obviously not denying that inflation can in some 
cases have real effects on wealth, the return on wealth, and the distribution of 
wealth. The effect, however, is largely one of redistributing wealth among as¬ 
set categories rather than a long-term structural effect. For example, I showed 
earlier that inflation played a central role in virtually wiping out the value of 
public debt in the rich countries in the wake of the two world wars. But when 
inflation remains high for a considerable period of time, investors will try to 
protect themselves by investing in real assets. There is every reason to believe 
that the largest fortunes are often those that are best indexed and most diver¬ 
sified over the long run, while smaller fortunes—typically checking or savings 
accounts—are the most seriously affected by inflation. 

To be sure, one could argue that the transition from virtually zero infla¬ 
tion in the nineteenth century to 2 percent inflation in the late twentieth and 
early twenty-first centuries led to a slight decrease in the pure return on capi¬ 
tal, in the sense that it is easier to be a rentier in a regime of zero inflation 
(where wealth accumulated in the past runs no risk of being whittled away by 


211 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


rising prices), whereas today’s investor must spend more time reallocating her 
wealth among different asset categories in order to achieve the best invest¬ 
ment strategy. Again, however, there is no certainty that the largest fortunes 
are the ones most affected by inflation or that relying on inflation to reduce 
the influence of wealth accumulated in the past is the best way of attaining 
that goal. I will come back to this key question in the next Part Three, when I 
turn to the way the effective returns obtained by different investors vary with 
size of fortune, and in Part Four, when I compare the various institutions and 
policies that may influence the distribution of wealth, including primarily 
taxes and inflation. At this stage, let me note simply that inflation primarily 
plays a role—sometimes desirable, sometimes not—in redistributing wealth 
among those who have it. In any case, the potential impact of inflation on the 
average return on capital is fairly limited and much smaller than the apparent 
nominal effect. 13 


What Is Capital Used For? 

Using the best available historical data, I have shown how the return on capi¬ 
tal evolved over time. I will now try to explain the changes observed. How is 
the rate of return on capital determined in a particular society at a particular 
point in time? What are the main social and economic forces at work, why do 
these forces change over time, and what can we predict about how the rate of 
return on capital will evolve in the twenty-first century? 

According to the simplest economic models, assuming “pure and perfect” 
competition in both capital and labor markets, the rate of return on capital 
should be exactly equal to the “marginal productivity” of capital (that is, the 
additional output due to one additional unit of capital). In more complex 
models, which are also more realistic, the rate of return on capital also depends 
on the relative bargaining power of the various parties involved. Depending on 
the situation, it may be higher or lower than the marginal productivity of capi¬ 
tal (especially since this quantity is not always precisely measurable). 

In any case, the rate of return on capital is determined by the following 
two forces: first, technology (what is capital used for?), and second, the abun¬ 
dance of the capital stock (too much capital kills the return on capital). 

Technology naturally plays a key role. If capital is of no use as a factor of 
production, then by definition its marginal productivity is zero. In the ab- 


212 


THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 


stract, one can easily imagine a society in which capital is of no use in the 
production process: no investment can increase the productivity of farmland, 
no tool or machine can increase output, and having a roof over one’s head 
adds nothing to well-being compared with sleeping outdoors. Yet capital might 
still play an important role in such a society as a pure store of value: for ex¬ 
ample, people might choose to accumulate piles of food (assuming that con¬ 
ditions allow for such storage) in anticipation of a possible future famine or 
perhaps for purely aesthetic reasons (adding piles of jewels and other ornaments 
to the food piles, perhaps). In the abstract, nothing prevents us from imagin¬ 
ing a society in which the capital/income ratio (3 is quite high but the return 
on capital r is strictly zero. In that case, the share of capital in national income, 
a = r X ( 3 , would also be zero. In such a society, all of national income and out¬ 
put would go to labor. 

Nothing prevents us from imagining such a society, but in all known hu¬ 
man societies, including the most primitive, things have been arranged dif¬ 
ferently. In all civilizations, capital fulfills two economic functions: first, it 
provides housing (more precisely, capital produces “housing services,” whose 
value is measured by the equivalent rental value of dwellings, defined as the 
increment of well-being due to sleeping and living under a roof rather than 
outside), and second, it serves as a factor of production in producing other 
goods and services (in processes of production that may require land, tools, 
buildings, offices, machinery, infrastructure, patents, etc.). Historically, the 
earliest forms of capital accumulation involved both tools and improvements 
to land (fencing, irrigation, drainage, etc.) and rudimentary dwellings (caves, 
tents, huts, etc.). Increasingly sophisticated forms of industrial and business 
capital came later, as did constantly improved forms of housing. 

The Notion of Marginal Productivity of Capital 

Concretely, the marginal productivity of capital is defined by the value of the 
additional production due to one additional unit of capital. Suppose, for ex¬ 
ample, that in a certain agricultural society, a person with the equivalent of 
ioo euros’ worth of additional land or tools (given the prevailing price of land 
and tools) can increase food production by the equivalent of 5 euros per year 
(all other things being equal, in particular the quantity of labor utilized). We 
then say that the marginal productivity of capital is 5 euros for an investment 


213 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


of ioo euros, or 5 percent a year. Under conditions of pure and perfect compe¬ 
tition, this is the annual rate of return that the owner of the capital (land or 
tools) should obtain from the agricultural laborer. If the owner seeks to ob¬ 
tain more than 5 percent, the laborer will rent land and tools from another 
capitalist. And if the laborer wants to pay less than 5 percent, then the land 
and tools will go to another laborer. Obviously, there can be situations in 
which the landlord is in a monopoly position when it comes to renting land 
and tools or purchasing labor (in the latter case one speaks of “monopsony” 
rather than monopoly), in which case the owner of capital can impose a rate 
of return greater than the marginal productivity of his capital. 

In a more complex economy, where there are many more diverse uses of 
capital—one can invest 100 euros not only in farming but also in housing or 
in an industrial or service firm—the marginal productivity of capital may be 
difficult to determine. In theory, this is the function of the system of financial 
intermediation (banks and financial markets): to find the best possible uses 
for capital, such that each available unit of capital is invested where it is most 
productive (at the opposite ends of the earth, if need be) and pays the highest 
possible return to the investor. A capital market is said to be “perfect” if it 
enables each unit of capital to be invested in the most productive way possible 
and to earn the maximal marginal product the economy allows, if possible as 
part of a perfectly diversified investment portfolio in order to earn the average 
return risk-free while at the same time minimizing intermediation costs. 

In practice, financial institutions and stock markets are generally a long 
way from achieving this ideal of perfection. They are often sources of chronic 
instability, waves of speculation, and bubbles. To be sure, it is not a simple 
task to find the best possible use for each unit of capital around the world, or 
even within the borders of a single country. What is more, “short-termism” 
and “creative accounting” are sometimes the shortest path to maximizing the 
immediate private return on capital. Whatever institutional imperfections 
may exist, however, it is clear that systems of financial intermediation have 
played a central and irreplaceable role in the history of economic development. 
The process has always involved a very large number of actors, not just banks 
and formal financial markets: for example, in the eighteenth and nineteenth 
centuries, notaries played a central role in bringing investors together with 
entrepreneurs in need of financing, such as Pere Goriot with his pasta facto¬ 
ries and Cesar Birotteau with his desire to invest in real estate. 14 


214 


THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 


It is important to state clearly that the notion of marginal productivity of 
capital is defined independently of the institutions and rules—or absence of 
rules—that define the capital-labor split in a given society. For example, if an 
owner of land and tools exploits his own capital, he probably does not account 
separately for the return on the capital that he invests in himself. Yet this 
capital is nevertheless useful, and his marginal productivity is the same as if 
the return were paid to an outside investor. The same is true if the economic 
system chooses to collectivize all or part of the capital stock, and in extreme 
cases (the Soviet Union, for example) to eliminate all private return on capi¬ 
tal. In that case, the private return is less than the “social” return on capital, 
but the latter is still defined as the marginal productivity of an additional unit 
of capital. Is it useful and just for the owners of capital to receive this marginal 
product as payment for their ownership of property (whether their own past 
savings or that of their ancestors) even if they contribute no new work? This is 
clearly a crucial question, but not the one I am asking here. 

Too Much Capital Kills the Return on Capital 

Too much capital kills the return on capital: whatever the rules and institu¬ 
tions that structure the capital-labor split may be, it is natural to expect that 
the marginal productivity of capital decreases as the stock of capital increases. 
For example, if each agricultural worker already has thousands of hectares to 
farm, it is likely that the extra yield of an additional hectare of land will be 
limited. Similarly, if a country has already built a huge number of new dwell¬ 
ings, so that every resident enjoys hundreds of square feet of living space, then 
the increase to well-being of one additional building—as measured by the 
additional rent an individual would be prepared to pay in order to live in that 
building—would no doubt be very small. The same is true for machinery 
and equipment of any kind: marginal productivity decreases with quantity 
beyond a certain threshold. (Although it is possible that some minimum 
number of tools are needed to begin production, saturation is eventually 
reached.) Conversely, in a country where an enormous population must 
share a limited supply of land, scarce housing, and a small supply of tools, 
then the marginal product of an additional unit of capital will naturally be 
quite high, and the fortunate owners of that capital will not fail to take ad¬ 
vantage of this. 


215 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


The interesting question is therefore not whether the marginal productiv¬ 
ity of capital decreases when the stock of capital increases (this is obvious) but 
rather how fast it decreases. In particular, the central question is how much 
the return on capital r decreases (assuming that it is equal to the marginal 
productivity of capital) when the capital/income ratio (3 increases. Two cases 
are possible. If the return on capital r falls more than proportionately when 
the capital/income ratio (3 increases (for example, if r decreases by more than 
half when (3 is doubled), then the share of capital income in national income 
a = rX (3 decreases when (3 increases. In other words, the decrease in the re¬ 
turn on capital more than compensates for the increase in the capital/income 
ratio. Conversely, if the return r falls less than proportionately when (3 in¬ 
creases (for example, if r decreases by less than half when (3 is doubled), then 
capital’s share a = rX (3 increases when (3 increases. In that case, the effect of 
the decreased return on capital is simply to cushion and moderate the increase 
in the capital share compared to the increase in the capital/income ratio. 

Based on historical evolutions observed in Britain and France, the second 
case seems more relevant over the long run: the capital share of income, a, fol¬ 
lows the same U-shaped curve as the capital income ratio, (3 (with a high level 
in the eighteenth and nineteenth centuries, a drop in the middle of the twen¬ 
tieth century, and a rebound in the late twentieth and early twenty-first cen¬ 
turies). The evolution of the rate of return on capital, r, significantly reduces 
the amplitude of this U-curve, however: the return on capital was particularly 
high after World War II, when capital was scarce, in keeping with the princi¬ 
ple of decreasing marginal productivity. But this effect was not strong enough 
to invert the U-curve of the capital/income ratio, ( 3 , and transform it into an 
inverted U-curve for the capital share a. 

It is nevertheless important to emphasize that both cases are theoretically 
possible. Everything depends on the vagaries of technology, or more precisely, 
everything depends on the range of technologies available to combine capital 
and labor to produce the various types of goods and services that society 
wants to consume. In thinking about these questions, economists often use 
the concept of a “production function,” which is a mathematical formula re¬ 
flecting the technological possibilities that exist in a given society. One char¬ 
acteristic of a production function is that it defines an elasticity of substitu¬ 
tion between capital and labor: that is, it measures how easy it is to substitute 
capital for labor, or labor for capital, to produce required goods and services. 


THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 


For example, if the coefficients of the production function are completely 
fixed, then the elasticity of substitution is zero: it takes exactly one hectare 
and one tool per agricultural worker (or one machine per industrial worker), 
neither more nor less. If each worker has as little as i/ioo hectare too much or 
one tool too many, the marginal productivity of the additional capital will be 
zero. Similarly, if the number of workers is one too many for the available 
capital stock, the extra worker cannot be put to work in any productive way. 

Conversely, if the elasticity of substitution is infinite, the marginal pro¬ 
ductivity of capital (and labor) is totally independent of the available quantity 
of capital and labor. In particular, the return on capital is fixed and does not 
depend on the quantity of capital: it is always possible to accumulate more capi¬ 
tal and increase production by a fixed percentage, for example, 5 or 10 percent a 
year per unit of additional capital. Think of an entirely robotized economy in 
which one can increase production at will simply by adding more capital. 

Neither of these two extreme cases is really relevant: the first sins by want 
of imagination and the second by excess of technological optimism (or pessi¬ 
mism about the human race, depending on one’s point of view). The relevant 
question is whether the elasticity of substitution between labor and capital is 
greater or less than one. If the elasticity lies between zero and one, then an 
increase in the capital/income ratio (3 leads to a decrease in the marginal pro¬ 
ductivity of capital large enough that the capital share a = r X (3 decreases (as¬ 
suming that the return on capital is determined by its marginal productivity). 15 
If the elasticity is greater than one, an increase in the capital/income ratio (3 
leads instead to a drop in the marginal productivity of capital, so that the capital 
share a = r X (3 increases (again assuming that the return on capital is equal to 
its marginal productivity). 16 If the elasticity is exactly equal to one, then the 
two effects cancel each other out: the return on capital decreases in exactly 
the same proportion as the capital/income ratio (3 increases, so that the prod¬ 
uct (X = rX(3 does not change. 

Beyond Cobb-Douglas: The Question of the Stability 
of the Capital-Labor Split 

The case of an elasticity of substitution exactly equal to one corresponds to 
the so-called Cobb-Douglas production function, named for the econo¬ 
mists Charles Cobb and Paul Douglas, who first proposed it in 1928. With 


217 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


a Cobb-Douglas production function, no matter what happens, and in par¬ 
ticular no matter what quantities of capital and labor are available, the capital 
share of income is always equal to the fixed coefficient a, which can be taken 
as a purely technological parameter. 17 

For example, if a =30 percent, then no matter what the capital/income 
ratio is, income from capital will account for 30 percent of national income 
(and income from labor for 70 percent). If the savings rate and growth rate are 
such that the long-term capital/income ratio (3 = 5/^corresponds to six years 
of national income, then the rate of return on capital will be 5 percent, so that 
the capital share of income will be 30 percent. If the long-term capital stock is 
only three years of national income, then the return on capital will rise to 10 
percent. And if the savings and growth rates are such that the capital stock 
represents ten years of national income, then the return on capital will fall to 
3 percent. In all cases, the capital share of income will be 30 percent. 

The Cobb-Douglas production function became very popular in econom¬ 
ics textbooks after World War II (after being popularized by Paul Samuelson), 
in part for good reasons but also in part for bad ones, including simplicity 
(economists like simple stories, even when they are only approximately cor¬ 
rect), but above all because the stability of the capital-labor split gives a fairly 
peaceful and harmonious view of the social order. In fact, the stability of capi¬ 
tal’s share of income—assuming it turns out to be true—in no way guaran¬ 
tees harmony: it is compatible with extreme and untenable inequality of the 
ownership of capital and distribution of income. Contrary to a widespread idea, 
moreover, stability of capital’s share of national income in no way implies sta¬ 
bility of the capital/income ratio, which can easily take on very different values 
at different times and in different countries, so that, in particular, there can be 
substantial international imbalances in the ownership of capital. 

The point I want to emphasize, however, is that historical reality is more 
complex than the idea of a completely stable capital-labor split suggests. The 
Cobb-Douglas hypothesis is sometimes a good approximation for certain sub¬ 
periods or sectors and, in any case, is a useful point of departure for further 
reflection. But this hypothesis does not satisfactorily explain the diversity of 
the historical patterns we observe over the long, short, or medium run, as the 
data I have collected show. 

Furthermore, there is nothing really surprising about this, given that 
economists had very little historical data to go on when Cobb and Douglas 


THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 


first proposed their hypothesis. In their original article, published in 1928, 
these two American economists used data about US manufacturing in the 
period 1899-1922, which did indeed show a certain stability in the share of 
income going to profits. 18 This idea appears to have been first introduced by 
the British economist Arthur Bowley, who in 1920 published an important 
book on the distribution of British national income in the period 1880-1913 
whose primary conclusion was that the capital-labor split remained rela¬ 
tively stable during this period. 19 Clearly, however, the periods analyzed by 
these authors were relatively short: in particular, they did not try to compare 
their results with estimates from the early nineteenth century (much less the 
eighteenth). 

As noted, moreover, these questions aroused very strong political tensions 
in the late nineteenth and early twentieth centuries, as well as throughout the 
Cold War, that were not conducive to a calm consideration of the facts. Both 
conservative and liberal economists were keen to show that growth benefited 
everyone and thus were very attached to the idea that the capital-labor split 
was perfectly stable, even if believing this sometimes meant neglecting data or 
periods that suggested an increase in the share of income going to capital. By 
the same token, Marxist economists liked to show that capital’s share was al¬ 
ways increasing while wages stagnated, even if believing this sometimes re¬ 
quired twisting the data. In 1899, Eduard Bernstein, who had the temerity to 
argue that wages were increasing and the working class had much to gain from 
collaborating with the existing regime (he was even prepared to become vice 
president of the Reichstag), was roundly outvoted at the congress of the 
German Social Democratic Party in Hanover. In 1937, the young German 
historian and economist Jurgen Kuczynski, who later became a well-known 
professor of economic history at Humboldt University in East Berlin and 
who in 1960-1972 published a monumental thirty-eight-volume universal 
history of wages, attacked Bowley and other bourgeois economists. Kuczyn¬ 
ski argued that labor’s share of national income had decreased steadily from 
the advent of industrial capitalism until the 1930s. This was true for the first 
half—indeed, the first two-thirds—of the nineteenth century but wrong 
for the entire period. 20 In the years that followed, controversy raged in the 
pages of academic journals. In 1939, in Economic History Review, where calmer 
debates where the norm, Frederick Brown unequivocally backed Bowley, 
whom he characterized as a “great scholar” and “serious statistician,” whereas 


219 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


Kuczynski in his view was nothing more than a “manipulator,” a charge that 
was wide of the mark. 21 Also in 1939, Keynes took the side of the bourgeois 
economists, calling the stability of the capital-labor split “one of the best- 
established regularities in all of economic science.” This assertion was hasty to 
say the least, since Keynes was essentially relying on data from British manu¬ 
facturing industry in the 1920s, which were insufficient to establish a univer¬ 
sal regularity. 22 

In textbooks published in the period 1950-1970 (and indeed as late as 
1990), a stable capital-labor split is generally presented as an uncontroversial 
fact, but unfortunately the period to which this supposed law applies is not 
always clearly specified. Most authors are content to use data going back no 
further than 1950, avoiding comparison with the interwar period or the early 
twentieth century, much less with the eighteenth and nineteenth centuries. 
From the 1990s on, however, numerous studies mention a significant increase 
in the share of national income in the rich countries going to profits and 
capital after 1970, along with the concomitant decrease in the share going to 
wages and labor. The universal stability thesis thus began to be questioned, 
and in the 2000s several official reports published by the Organisation for 
Economic Cooperation and Development (OECD) and International Mon¬ 
etary Fund (IMF) took note of the phenomenon (a sign that the question was 
being taken seriously). 23 

The novelty of this study is that it is to my knowledge the first attempt to 
place the question of the capital-labor split and the recent increase of capital’s 
share of national income in a broader historical context by focusing on the 
evolution of the capital/income ratio from the eighteenth century until now. The 
exercise admittedly has its limits, in view of the imperfections of the avail¬ 
able historical sources, but I believe that it gives us a better view of the major 
issues and puts the question in a whole new light. 

Capital-Labor Substitution in the Twenty-First Century: 

An Elasticity Greater Than One 

I begin by examining the inadequacy of the Cobb-Douglas model for study¬ 
ing evolutions over the very long run. Over a very long period of time, the 
elasticity of substitution between capital and labor seems to have been greater 
than one: an increase in the capital/income ratio (3 seems to have led to a 


220 


THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 


slight increase in a, capital’s share of national income, and vice versa. Intui¬ 
tively, this corresponds to a situation in which there are many different uses 
for capital in the long run. Indeed, the observed historical evolutions suggest 
that it is always possible—up to a certain point, at least—to find new and use¬ 
ful things to do with capital: for example, new ways of building and equip¬ 
ping houses (think of solar panels on rooftops or digital lighting controls), 
ever more sophisticated robots and other electronic devices, and medical 
technologies requiring larger and larger capital investments. One need not 
imagine a fully robotized economy in which capital would reproduce itself 
(corresponding to an infinite elasticity of substitution) to appreciate the many 
uses of capital in a diversified advanced economy in which the elasticity of 
substitution is greater than one. 

It is obviously quite difficult to predict how much greater than one the 
elasticity of substitution of capital for labor will be in the twenty-first century. 
On the basis of historical data, one can estimate an elasticity between 1.3 and 
i.6. 24 But not only is this estimate uncertain and imprecise. More than that, 
there is no reason why the technologies of the future should exhibit the same 
elasticity as those of the past. The only thing that appears to be relatively well 
established is that the tendency for the capital/income ratio (3 to rise, as has 
been observed in the rich countries in recent decades and might spread to 
other countries around the world if growth (and especially demographic growth) 
slows in the twenty-first century, may well be accompanied by a durable increase 
in capital’s share of national income, a. To be sure, it is likely that the return 
on capital, r, will decrease as (3 increases. But on the basis of historical experience, 
the most likely outcome is that the volume effect will outweigh the price effect, 
which means that the accumulation effect will outweigh the decrease in the 
return on capital. 

Indeed, the available data indicate that capital’s share of income increased 
in most rich countries between 1970 and 2010 to the extent that the capital/ 
income ratio increased (see Figure 6.5). Note, however, that this upward trend 
is consistent not only with an elasticity of substitution greater than one but 
also with an increase in capital’s bargaining power vis-a-vis labor over the past 
few decades, which have seen increased mobility of capital and heightened 
competition between states eager to attract investments. It is likely that the 
two effects have reinforced each other in recent years, and it is also possible 
that this will continue to be the case in the future. In any event, it is important 


221 


Capital income (% national income) 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


40% 


35 % 


Z5% 


zo% 


15% 



FIGURE 6.5. The capital share in rich countries, 1975-2010 

Capital income absorbs between 15 percent and 25 percent of national income in rich 
countries in 1970, and between 25 percent and 30 percent in 2000-2010. 

Sources and series: see piketty.pse.ens.fr/capital21c 


to point out that no self-corrective mechanism exists to prevent a steady in¬ 
crease of the capital/income ratio, ( 3 , together with a steady rise in capital’s 
share of national income, a. 

Traditional Agricultural Societies: An Elasticity Less Than One 

I have just shown that an important characteristic of contemporary econo¬ 
mies is the existence of many opportunities to substitute capital for labor. It is 
interesting that this was not at all the case in traditional economies based on 
agriculture, where capital existed mainly in the form of land. The available 
historical data suggest very clearly that the elasticity of substitution was sig¬ 
nificantly less than one in traditional agricultural societies. In particular, this 
is the only way to explain why, in the eighteenth and nineteenth centuries, 
the value of land in the United States, as measured by the capital/income ratio 
and land rents, was much lower than in Europe, even though land was much 
more plentiful in the New World. 

This is perfectly logical, moreover: if capital is to serve as a ready substitute 
for labor, then it must exist in different forms. For any given form of capital 


222 

























THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 


(such as farmland in the case in point), it is inevitable that beyond a certain 
point, the price effect will outweigh the volume effect. If a few hundred indi¬ 
viduals have an entire continent at their disposal, then it stands to reason that 
the price of land and land rents will fall to near-zero levels. There is no better 
illustration of the maxim “Too much capital kills the return on capital” than 
the relative value of land and land rents in the New World and the Old. 

Is Human Capital Illusory? 

The time has come to turn to a very important question: Has the apparently 
growing importance of human capital over the course of history been an 
illusion? Let me rephrase the question in more precise terms. Many people 
believe that what characterizes the process of development and economic 
growth is the increased importance of human labor, skill, and know-how in 
the production process. Although this hypothesis is not always formulated in 
explicit terms, one reasonable interpretation would be that technology has 
changed in such a way that the labor factor now plays a greater role. 25 Indeed, 
it seems plausible to interpret in this way the decrease in capital’s share of in¬ 
come over the very long run, from 35-40 percent in 1800-1810 to 25-30 percent 
in 2000-2010, with a corresponding increase in labor’s share from 60-65 per¬ 
cent to 70-75 percent. Labor’s share increased simply because labor became 
more important in the production process. Thus it was the growing power of 
human capital that made it possible to decrease the share of income going to 
land, buildings, and financial capital. 

If this interpretation is correct, then the transformation to which it points 
was indeed quite significant. Caution is in order, however. For one thing, as 
noted earlier, we do not have sufficient perspective at this point in history to 
reach an adequate judgment about the very long-run evolution of capital’s 
share of income. It is quite possible that capital’s share will increase in coming 
decades to the level it reached at the beginning of the nineteenth century. 
This may happen even if the structural form of technology—and the relative 
importance of capital and labor—does not change (although the relative bar¬ 
gaining power of labor and capital may change) or if technology changes only 
slightly (which seems to me the more plausible alternative) yet the increase in 
the capital/income ratio drives capital’s share of income toward or perhaps 
beyond historic peaks because the long-run elasticity of substitution of capital 


223 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


for labor is apparently greater than one. This is perhaps the most important 
lesson of this study thus far: modern technology still uses a great deal of capital, 
and even more important, because capital has many uses, one can accumulate 
enormous amounts of it without reducing its return to zero. Under these condi¬ 
tions, there is no reason why capital’s share must decrease over the very long 
run, even if technology changes in a way that is relatively favorable to labor. 

A second reason for caution is the following. The probable long-run de¬ 
crease in capital’s share of national income from 35-40 percent to 2.5-30 per¬ 
cent is, I think, quite plausible and surely significant but does not amount to 
a change of civilization. Clearly, skill levels have increased markedly over the 
past two centuries. But the stock of industrial, financial, and real estate capi¬ 
tal has also increased enormously. Some people think that capital has lost its 
importance and that we have magically gone from a civilization based on capi¬ 
tal, inheritance, and kinship to one based on human capital and talent. Fat- 
cat stockholders have supposedly been replaced by talented managers thanks 
solely to changes in technology. I will come back to this question in Part 
Three when I turn to the study of individual inequalities in the distribution 
of income and wealth: a correct answer at this stage is impossible. But I have 
already shown enough to warn against such mindless optimism: capital has 
not disappeared for the simple reason that it is still useful—hardly less useful 
than in the era of Balzac and Austen, perhaps—and may well remain so in the 
future. 


Medium-Term Changes in the Capital-Labor Split 

I have just shown that the Cobb-Douglas hypothesis of a completely stable 
capital-labor split cannot give a totally satisfactory explanation of the long¬ 
term evolution of the capital-labor split. The same can be said, perhaps even 
more strongly, about short- and medium-term evolutions, which can in some 
cases extend over fairly long periods, particularly as seen by contemporary 
witnesses to these changes. 

The most important case, which I discussed briefly in the Introduction, is 
no doubt the increase in capital’s share of income during the early phases of 
the Industrial Revolution, front 1800 to i860. In Britain, for which we have 
the most complete data, the available historical studies, in particular those of 
Robert Allen (who gave the name “Engels’ pause” to the long stagnation of 


224 


THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 


wages), suggest that capital’s share increased by something like io percent of 
national income, from 35-40 percent in the late eighteenth and early nine¬ 
teenth centuries to around 45-50 percent in the middle of the nineteenth 
century, when Marx wrote The Communist Manifesto and set to work on 
Capital. The sources also suggest that this increase was roughly compensated 
by a comparable decrease in capital’s share in the period 1870-1900, followed 
by a slight increase between 1900 and 1910, so that in the end the capital share 
was probably not very different around the turn of the twentieth century 
from what it was during the French Revolution and Napoleonic era (see Fig¬ 
ure 6.1). We can therefore speak of a “medium-term” movement rather than a 
durable long-term trend. Nevertheless, this transfer of 10 percent of national 
income to capital during the first half of the nineteenth century was by no 
means negligible: to put it in concrete terms, the lion’s share of economic 
growth in this period went to profits, while wages—objectively miserable— 
stagnated. According to Allen, the main explanation for this was the exodus 
of labor from the countryside and into the cities, together with technological 
changes that increased the productivity of capital (reflected by a structural 
change in the production function)—the caprices of technology, in short. 26 

Available historical data for France suggest a similar chronology. In par¬ 
ticular, all the sources indicate a serious stagnation of wages in the period 
1810-1850 despite robust industrial growth. The data collected by Jean Bou- 
vier and Francois Furet from the books of leading French industrial firms 
confirm this chronology: the share of profits increased until i860, then de¬ 
creased from 1870 to 1900, and rose again between 1900 and 1910. 27 

The data we have for the eighteenth century and the period of the French 
Revolution also suggest an increase in the share of income going to land rent 
in the decades preceding the revolution (which seems consistent with Arthur 
Young’s observations about the misery of French peasants), 28 and substantial 
wage increases between 1789 and 1815 (which can conceivably be explained by 
the redistribution of land and the mobilization of labor to meet the needs of 
military conflict). 29 When the lower classes of the Restoration and July Mon¬ 
archy looked back on the revolutionary period and the Napoleonic era, they 
accordingly remembered good times. 

To remind ourselves that these short- and medium-term changes in the 
capital-labor split occur at many different times, I have shown the annual evolu¬ 
tion in France from 1900 to 2010 in Figures 6.6-8, in which I distinguish the 


225 


Share of housing rent in national income Profit share in value added 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 



FIGURE 6.6. The profit share in the value added of corporations in France, 
1900-2010 

The share of gross profits in gross value added of corporations rose from 25 percent 
in 1982 to 33 percent in 2010; the share of net profits in net value added rose from 12 
percent to 20 percent. 

Sources and series: see piketty.pse.ens.fr/capital21c. 



FIGURE 6.7. The share of housing rent in national income in France, 1900-2010 

The share of housing rent (rental value of dwellings) rose from 2 percent of national 
income in 1948 to 10 percent in 2010. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


226 





















































































THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 



FIGURE 6.8. The capital share in national income in France, 1900-2010 

The share of capital income (net profits and rents) rose from 15 percent of national in¬ 
come in 1982 to 27 percent in 2010. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


evolution of the wage-profit split in value added by firms front the evolution 
of the share of rent in national income. 30 Note, in particular, that the wage- 
profit split has gone through three distinct phases since World War II, with a 
sharp rise in profits from 1945 to 1968 followed by a very pronounced drop in 
the share of profits from 1968 to 1983 and then a very rapid rise after 1983 lead¬ 
ing to stabilization in the early 1990s. I will have more to say about this highly 
political chronology in subsequent chapters, where I will discuss the dynamics of 
income inequality. Note the steady rise of the share of national income going to 
rent since 1945, which implies that the share going to capital overall continued to 
increase between 1990 and 2010, despite the stabilization of the profit share. 

Back to Marx and the Falling Rate of Profit 

As I come to the end of this examination of the historical dynamics of the 
capital/income ratio and the capital-labor split, it is worth pointing out the 
relation between my conclusions and the theses of Karl Marx. 

For Marx, the central mechanism by which “the bourgeoisie digs its own 
grave” corresponded to what I referred to in the Introduction as “the principle 


227 






























THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


of infinite accumulation”: capitalists accumulate ever increasing quantities of 
capital, which ultimately leads inexorably to a falling rate of profit (i.e., return 
on capital) and eventually to their own downfall. Marx did not use mathe¬ 
matical models, and his prose was not always limpid, so it is difficult to be sure 
what he had in mind. But one logically consistent way of interpreting his 
thought is to consider the dynamic law (3 —s/g in the special case where the 
growth rate g is zero or very close to zero. 

Recall that g measures the long-term structural growth rate, which is the 
sum of productivity growth and population growth. In Marx’s mind, as in 
the minds of all nineteenth- and early twentieth-century economists before 
Robert Solow did his work on growth in the 1950s, the very idea of structural 
growth, driven by permanent and durable growth of productivity, was not 
clearly identified or formulated. 31 In those days, the implicit hypothesis was 
that growth of production, and especially of manufacturing output, was ex¬ 
plained mainly by the accumulation of industrial capital. In other words, 
output increased solely because every worker was backed by more machinery 
and equipment and not because productivity as such (for a given quantity of 
labor and capital) increased. Today we know that long-term structural growth 
is possible only because of productivity growth. But this was not obvious in 
Marx’s time, owing to lack of historical perspective and good data. 

Where there is no structural growth, and the productivity and population 
growth rate g is zero, we run up against a logical contradiction very close to 
what Marx described. If the savings rate s is positive, meaning the capitalists 
insist on accumulating more and more capital every year in order to increase 
their power and perpetuate their advantages or simply because their standard 
of living is already so high, then the capital/income ratio will increase indefi¬ 
nitely. More generally, if^is close to zero, the long-term capital/income ratio 
(3 = s/g tends toward infinity. And if (3 is extremely large, then the return on 
capital r must get smaller and smaller and closer and closer to zero, or else capi¬ 
tal’s share of income, a = r X ( 3 , will ultimately devour all of national income. 32 

The dynamic inconsistency that Marx pointed out thus corresponds to a 
real difficulty, from which the only logical exit is structural growth, which is 
the only way of balancing the process of capital accumulation (to a certain 
extent). Only permanent growth of productivity and population can com¬ 
pensate for the permanent addition of new units of capital, as the law (3 =s/g 
makes clear. Otherwise, capitalists do indeed dig their own grave: either they 


228 


THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 


tear each other apart in a desperate attempt to combat the falling rate of 
profit (for instance, by waging war over the best colonial investments, as Ger¬ 
many and France did in the Moroccan crises of 1905 and 1911), or they force 
labor to accept a smaller and smaller share of national income, which ulti¬ 
mately leads to a proletarian revolution and general expropriation. In any 
event, capital is undermined by its internal contradictions. 

That Marx actually had a model of this kind in mind (i.e., a model based 
on infinite accumulation of capital) is confirmed by his use on several occa¬ 
sions of the account books of industrial firms with very high capital intensi¬ 
ties. In volume 1 of Capital, for instance, he uses the books of a textile factory, 
which were conveyed to him, he says, “by the owner,” and seem to show an 
extremely high ratio of the total amount of fixed and variable capital used in 
the production process to the value of a year’s output—apparently greater 
than ten. A capital/income ratio of this level is indeed rather frightening. If the 
rate of return on capital is 5 percent, then more than half the value of the 
firm’s output goes to profits. It was natural for Marx and many other anxious 
contemporary observers to ask where all this might lead (especially because 
wages had been stagnant since the beginning of the nineteenth century) and 
what type of long-run socioeconomic equilibrium such hyper-capital-intensive 
industrial development would produce. 

Marx was also an assiduous reader of British parliamentary reports from 
the period 1820-1860. He used these reports to document the misery of wage 
workers, workplace accidents, deplorable health conditions, and more gener¬ 
ally the rapacity of the owners of industrial capital. He also used statistics de¬ 
rived from taxes imposed on profits from different sources, which showed a 
very rapid increase of industrial profits in Britain during the 1840s. Marx 
even tried—in a very impressionistic fashion, to be sure—to make use of pro¬ 
bate statistics in order to show that the largest British fortunes had increased 
dramatically since the Napoleonic wars. 33 

The problem is that despite these important intuitions, Marx usually ad¬ 
opted a fairly anecdotal and unsystematic approach to the available statistics. 
In particular, he did not try to find out whether the very high capital intensity 
that he observed in the account books of certain factories was representative 
of the British economy as a whole or even of some particular sector of the 
economy, as he might have done by collecting just a few dozen similar ac¬ 
counts. The most surprising thing, given that his book was devoted largely to 


229 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


the question of capital accumulation, is that he makes no reference to the nu¬ 
merous attempts to estimate the British capital stock that had been carried 
out since the beginning of the eighteenth century and extended in the nine¬ 
teenth century by work beginning with Patrick Colqhoun between 1800 and 
1810 and continuing through Giffen in the 1870s. 34 Marx seems to have missed 
entirely the work on national accounting that was developing around him, 
and this is all the more unfortunate in that it would have enabled him to 
some extent to confirm his intuitions concerning the vast accumulation of 
private capital in this period and above all to clarify his explanatory model. 

Beyond the “Two Cambridges” 

It is important to recognize, however, that the national accounts and other 
statistical data available in the late nineteenth and early twentieth centuries 
were wholly inadequate for a correct understanding of the dynamics of the 
capital/income ratio. In particular, there were many more estimates of the 
stock of national capital than of national income or domestic product. By 
the mid-twentieth century, following the shocks of 1914-1945, the reverse was 
true. This no doubt explains why the question of capital accumulation and a 
possible dynamic equilibrium continued to stir controversy and arouse a good 
deal of confusion for so long. A good example of this is the famous “Cam¬ 
bridge capital controversy” of the 1950s and 1960s (also called the “Two Cam- 
bridges Debate” because it pitted Cambridge, England, against Cambridge, 
Massachusetts). 

To briefly recall the main points of this debate: when the formula (3 —slg 
was explicitly introduced for the first time by the economists Roy Harrod and 
Evsey Domar in the late 1930s, it was common to invert it as g—s! ( 3 . Harrod, 
in particular, argued in 1939 that (3 was fixed by the available technology (as in 
the case of a production function with fixed coefficients and no possible sub¬ 
stitution between labor and capital), so that the growth rate was entirely de¬ 
termined by the savings rate. If the savings rate is 10 percent and technology 
imposes a capital/income ratio of 5 (so that it takes exactly five units of capi¬ 
tal, neither more nor less, to produce one unit of output), then the growth rate 
of the economy’s productive capacity is 2 percent per year. But since the 
growth rate must also be equal to the growth rate of the population (and of 
productivity, which at the time was still ill defined), it follows that growth is 


230 


THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 


an intrinsically unstable process, balanced “on a razor’s edge.” There is always 
either too much or too little capital, which therefore gives rise either to excess 
capacity and speculative bubbles or else to unemployment, or perhaps both at 
once, depending on the sector and the year. 

Harrod’s intuition was not entirely wrong, and he was writing in the 
midst of the Great Depression, an obvious sign of great macroeconomic insta¬ 
bility. Indeed, the mechanism he described surely helps to explain why the 
growth process is always highly volatile: to bring savings into line with in¬ 
vestment at the national level, when savings and investment decisions are 
generally made by different individuals for different reasons, is a structurally 
complex and chaotic phenomenon, especially since it is often difficult in the 
short run to alter the capital intensity and organization of production. 35 Nev¬ 
ertheless, the capital/income ratio is relatively flexible in the long run, as is 
unambiguously demonstrated by the very large historical variations that are 
observed in the data, together with the fact that the elasticity of substitution 
of capital for labor has apparently been greater than one over a long period of 
time. 

In 1948, Domar developed a more optimistic and flexible version of the 
law^=5/(3 than Harrod’s. Domar stressed the fact that the savings rate and 
capital/income ratio can to a certain extent adjust to each other. Even more 
important was Solow’s introduction in 1956 of a production function with 
substitutable factors, which made it possible to invert the formula and write 
§ = s/g. In the long run, the capital/income ratio adjusts to the savings rate 
and structural growth rate of the economy rather than the other way around. 
Controversy continued, however, in the 1950s and 1960s between economists 
based primarily in Cambridge, Massachusetts (including Solow and Samuel- 
son, who defended the production function with substitutable factors) and 
economists working in Cambridge, England (including Joan Robinson, Nich¬ 
olas Kaldor, and Luigi Pasinetti), who (not without a certain confusion at 
times) saw in Solow’s model a claim that growth is always perfectly balanced, 
thus negating the importance Keynes had attributed to short-term fluctua¬ 
tions. It was not until the 1970s that Solow’s so-called neoclassical growth 
model definitively carried the day. 

If one rereads the exchanges in this controversy with the benefit of hind¬ 
sight, it is clear that the debate, which at times had a marked postcolonial di¬ 
mension (as American economists sought to emancipate themselves from the 


231 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


historic tutelage of their British counterparts, who had reigned over the pro¬ 
fession since the time of Adam Smith, while the British sought to defend the 
memory of Lord Keynes, which they thought the American economists had 
betrayed), did more to cloud economic thinking than to enlighten it. There 
was no real justification for the suspicions of the British. Solow and Samuel- 
son were fully convinced that the growth process is unstable in the short term 
and that macroeconomic stabilization requires Keynesian policies, and they 
viewed § = s/g solely as a long-term law. Nevertheless, the American econo¬ 
mists, some of whom (for example Franco Modigliani) were born in Europe, 
tended at times to exaggerate the implications of the “balanced growth path” 
they had discovered. 36 To be sure, the law §=s /g describes a growth path 
in which all macroeconomic quantities—capital stock, income and output 
flows—progress at the same pace over the long run. Still, apart from the ques¬ 
tion of short-term volatility, such balanced growth does not guarantee a har¬ 
monious distribution of wealth and in no way implies the disappearance or 
even reduction of inequality in the ownership of capital. Furthermore, con¬ 
trary to an idea that until recently was widespread, the law (3 =s/g in no way 
precludes very large variations in the capital/income ratio over time and be¬ 
tween countries. Quite the contrary. In my view, the virulence—and at times 
sterility—of the Cambridge capital controversy was due in part to the fact 
that participants on both sides lacked the historical data needed to clarify the 
terms of the debate. It is striking to see how little use either side made of na¬ 
tional capital estimates done prior to World War I; they probably believed 
them to be incompatible with the realities of the 1950s and 1960s. The two 
world wars created such a deep discontinuity in both conceptual and statisti¬ 
cal analysis that for a while it seemed impossible to study the issue in a long- 
run perspective, especially from a European point of view. 

Capital’s Comeback in a Low-Groivth Regime 

The truth is that only since the end of the twentieth century have we had the 
statistical data and above all the indispensable historical distance to correctly 
analyze the long-run dynamics of the capital/income ratio and the capital- 
labor split. Specifically, the data I have assembled and the historical distance 
we are fortunate enough to enjoy (still insufficient, to be sure, but by defini- 


232 


THE CAPITAL-LABOR SPLIT IN THE TWENTY-FIRST CENTURY 


tion greater than that which previous authors had) lead to the following 
conclusions. 

First, the return to a historic regime of low growth, and in particular zero 
or even negative demographic growth, leads logically to the return of capital. 
This tendency for low-growth societies to reconstitute very large stocks of capital 
is expressed by the law (3 —slg and can be summarized as follows: in stagnant 
societies, wealth accumulated in the past naturally takes on considerable 
importance. 

In Europe today, the capital/income ratio has already risen to around five 
to six years of national income, scarcely less than the level observed in the 
eighteenth and nineteenth centuries and up to the eve of World War I. 

At the global level, it is entirely possible that the capital/income ratio will 
attain or even surpass this level during the twenty-first century. If the savings 
rate is now around io percent and the growth rate stabilizes at around 1.5 per¬ 
cent in the very long run, then the global stock of capital will logically rise to 
six or seven years of income. And if growth falls to 1 percent, the capital stock 
could rise as high as ten years of income. 

As for capital’s share in national and global income, which is given by the 
law (X = rX|3, experience suggests that the predictable rise in the capital/in¬ 
come ratio will not necessarily lead to a significant drop in the return on capi¬ 
tal. There are many uses for capital over the very long run, and this fact can be 
captured by noting that the long-run elasticity of substitution of capital for 
labor is probably greater than one. The most likely outcome is thus that the 
decrease in the rate of return will be smaller than the increase in the capital/ 
income ratio, so that capital’s share will increase. With a capital/income ratio 
of seven to eight years and a rate of return on capital of 4-5 percent, capital’s 
share of global income could amount to 30 or 40 percent, a level close to that 
observed in the eighteenth and nineteenth centuries, and it might rise even 
higher. 

As noted, it is also possible that technological changes over the very long 
run will slightly favor human labor over capital, thus lowering the return on 
capital and the capital share. But the size of this long-term effect seems limited, 
and it is possible that it will be more than compensated by other forces tending 
in the opposite direction, such as the creation of increasingly sophisticated 
systems of financial intermediation and international competition for capital. 


233 


THE DYNAMICS OF THE CAPITAL/1NCOME RATIO 


The Caprices of Technology 

The principal lesson of this second part of the book is surely that there is no 
natural force that inevitably reduces the importance of capital and of income 
flowing from ownership of capital over the course of history. In the decades 
after World War II, people began to think that the triumph of human capital 
over capital in the traditional sense (land, buildings, and financial capital) 
was a natural and irreversible process, due perhaps to technology and to purely 
economic forces. In fact, however, some people were already saying that po¬ 
litical forces were central. My results fully confirm this view. Progress toward 
economic and technological rationality need not imply progress toward 
democratic and meritocratic rationality. The primary reason for this is simple: 
technology, like the market, has neither limits nor morality. The evolution of 
technology has certainly increased the need for human skills and compe¬ 
tence. But it has also increased the need for buildings, homes, offices, equip¬ 
ment of all kinds, patents, and so on, so that in the end the total value of all 
these forms of nonhuman capital (real estate, business capital, industrial capi¬ 
tal, financial capital) has increased almost as rapidly as total income from la¬ 
bor. If one truly wishes to found a more just and rational social order based on 
common utility, it is not enough to count on the caprices of technology. 

To sum up: modern growth, which is based on the growth of productivity 
and the diffusion of knowledge, has made it possible to avoid the apocalypse 
predicted by Marx and to balance the process of capital accumulation. But it 
has not altered the deep structures of capital—or at any rate has not truly re¬ 
duced the macroeconomic importance of capital relative to labor. I must now 
examine whether the same is true for inequality in the distribution of income 
and wealth. How much has the structure of inequality with respect to both 
labor and capital actually changed since the nineteenth century? 


234 


PART THREE 


THE STRUCTURE OF 
INEQUALITY 




{SEVEN } 


Inequality and Concentration: 
Preliminary Bearings 


In Part Two I examined the dynamics of both the capital/income ratio at the 
country level and the overall split of national income between capital and la¬ 
bor, but I did not look directly at income or wealth inequality at the individ¬ 
ual level. In particular, I analyzed the importance of the shocks of 1914-1945 
in order to understand changes in the capital/income ratio and the capital- 
labor split over the course of the twentieth century. The fact that Europe— 
and to some extent the entire world—have only just gotten over these shocks 
has given rise to the impression that patrimonial capitalism—which is flour¬ 
ishing in these early years of the twenty-first century—is something new, 
whereas it is in large part a repetition of the past and characteristic of a low- 
growth environment like the nineteenth century. 

Here begins my examination of inequality and distribution at the indi¬ 
vidual level. In the next few chapters, I will show that the two world wars, and 
the public policies that followed from them, played a central role in reducing 
inequalities in the twentieth century. There was nothing natural or spontane¬ 
ous about this process, in contrast to the optimistic predictions of Kuznets’s 
theory. I will also show that inequality began to rise sharply again since the 
1970s and 1980s, albeit with significant variation between countries, again 
suggesting that institutional and political differences played a key role. I will 
also analyze, from both a historical and a theoretical point of view, the evolu¬ 
tion of the relative importance of inherited wealth versus income from labor 
over the very long run. Many people believe that modern growth naturally 
favors labor over inheritance and competence over birth. What is the source 
of this widespread belief, and how sure can we be that it is correct? Finally, in 
Chapter 11 ,1 will consider how the global distribution of wealth might evolve 
in the decades to come. Will the twenty-first century be even more inegalitar¬ 
ian than the nineteenth, if it is not already so? In what respects is the struc¬ 
ture of inequality in the world today really different from that which existed 


237 


THE STRUCTURE OF INEQUALITY 


during the Industrial Revolution or in traditional rural societies? Part Two 
has already suggested some interesting leads to follow in this regard, but the 
only way to answer this crucial question is by analyzing the structure of ine¬ 
quality at the individual level. 

Before proceeding farther, in this chapter I must first introduce certain 
ideas and orders of magnitude. I begin by noting that in all societies, income 
inequality can be decomposed into three terms: inequality in income from 
labor; inequality in the ownership of capital and the income to which it gives 
rise; and the interaction between these two terms. Yautrin’s famous lesson to 
Rastignac in Balzac’s Pere Goriot is perhaps the clearest introduction to these 
issues. 


Vautrin’s Lesson 

Balzac’s Pere Goriot, published in 1835, could not be clearer. Pere Goriot, a for¬ 
mer spaghetti maker, has made a fortune in pasta and grain during the Revo¬ 
lution and Napoleonic era. A widower, he sacrifices everything he has to find 
husbands for his daughters Delphine and Anastasie in the best Parisian soci¬ 
ety of the 1810s. He keeps just enough to pay his room and board in a shabby 
boardinghouse, where he meets Eugene de Rastignac, a penniless young noble 
who has come up from the provinces to study law in Paris. Full of ambition 
and humiliated by his poverty, Eugene avails himself of the help of a distant 
cousin to worm his way into the luxurious salons where the aristocracy, 
grande bourgeoisie, and high finance of the Restoration mingle. He quickly 
falls in love with Delphine, who has been abandoned by her husband, Baron 
de Nucingen, a banker who has already used his wife’s dowry in any number 
of speculative ventures. Rastignac soon sheds his illusions as he discovers the 
cynicism of a society entirely corrupted by money. He is appalled to learn how 
Pere Goriot has been abandoned by his daughters, who, preoccupied as they 
are with social success, are ashamed of their father and have seen little of hint 
since availing themselves of his fortune. The old man dies in sordid poverty 
and solitude. Only Rastignac attends his burial. But no sooner has he left Pere 
Lachaise cemetery than he is overwhelmed by the sight of Parisian wealth on 
display along the Seine and decides to set out in conquest of the capital: “It’s 
just you and me now!” he apostrophizes the city. His sentimental and social 
education is over. From this point on he, too, will be ruthless. 


238 


INEQUALITY AND CONCENTRATION: PRELIMINARY BEARINGS 


The darkest moment in the novel, when the social and moral dilemmas 
Rastignac faces are rawest and clearest, comes at the midpoint, when the 
shady character Vautrin offers him a lesson about his future prospects. 1 Vau- 
trin, who resides in the same shabby boardinghouse as Rastignac and Goriot, 
is a glib talker and seducer who is concealing a dark past as a convict, much 
like Edmond Dantes in Le Comte de Monte-Cristo or Jean Valjean in Les Mi- 
serables. In contrast to those two characters, who are on the whole worthy 
fellows, Vautrin is deeply wicked and cynical. He attempts to lure Rastignac 
into committing a murder in order to lay hands on a large legacy. Before that, 
Vautrin offers Rastignac an extremely lurid, detailed lesson about the differ¬ 
ent fates that might befall a young man in the French society of the day. 

In substance, Vautrin explains to Rastignac that it is illusory to think that 
social success can be achieved through study, talent, and effort. He paints a 
detailed portrait of the various possible careers that await his young friend if 
he pursues studies in law or medicine, fields in which professional compe¬ 
tence counts more than inherited wealth. In particular, Vautrin explains very 
clearly to Rastignac what yearly income he can aspire to in each of these pro¬ 
fessions. The verdict is clear: even if he ranks at the top of his class and quickly 
achieves a brilliant career in law, which will require many compromises, he 
will still have to get by on a mediocre income and give up all hope of becom¬ 
ing truly wealthy: 

By the age of thirty, you will be a judge making 1,200 francs a year, if you 
haven’t yet tossed away your robes. When you reach forty, you will marry 
a miller’s daughter with an income of around 6,000 livres. Thank you very 
much. If you’re lucky enough to find a patron, you will become a royal 
prosecutor at thirty, with compensation of a thousand ecus [5,000 francs], 
and you will marry the mayor’s daughter. If you’re willing to do a little po¬ 
litical dirty work, you will be a prosecutor-general by the time you’re 
forty.... It is my privilege to point out to you, however, that there are only 
twenty prosecutors-general in France, while 20,000 of you aspire to the 
position, and among them are a few clowns who would sell their families 
to move up a rung. If this profession disgusts you, consider another. 
Would Baron de Rastignac like to be a lawyer? Very well then! You will 
need to suffer ten years of misery, spend a thousand francs a month, ac¬ 
quire a library and an office, frequent society, kiss the hem of a clerk to get 
cases, and lick the courthouse floor with your tongue. If the profession led 


239 


THE STRUCTURE OF INEQUALITY 


anywhere, I wouldn’t advise you against it. But can you name five lawyers 
in Paris who earn more than 50,000 Irancs a year at the age of fifty? 2 

By contrast, the strategy for social success that Vautrin proposes to Rastig- 
nac is quite a bit more efficient. By marrying Mademoiselle Victorine, a shy 
young woman who lives in the boardinghouse and has eyes only for the hand¬ 
some Eugene, he will immediately lay hands on a fortune of a million francs. 
This will enable him to draw at age twenty an annual income of 50,000 francs 
(5 percent of the capital) and thus immediately achieve ten times the level of 
comfort to which he could hope to aspire only years later on a royal prosecu¬ 
tor’s salary (and as much as the most prosperous Parisian lawyers of the day 
earned at age fifty after years of effort and intrigue). 

The conclusion is clear: he must lose no time in marryingyoung Victorine, 
ignoring the fact that she is neither very pretty nor very appealing. Eugene ea¬ 
gerly heeds Vautrin’s lesson right up to the ultimate coup de grace: if the ille¬ 
gitimate child Victorine is to be recognized by her wealthy father and become 
the heiress of the million francs Vautrin has mentioned, her brother must first 
be killed. The ex-convict is ready to take on this task in exchange for a com¬ 
mission. This is too much for Rastignac: although he is quite amenable to 
Vautrin’s arguments concerning the merits of inheritance over study, he is not 
prepared to commit murder. 


The Key Question: Work or Inheritance? 

What is most frightening about Vautrin’s lecture is that his brisk portrait of 
Restoration society contains such precise figures. As I will soon show, the 
structure of the income and wealth hierarchies in nineteenth-century France 
was such that the standard of living the wealthiest French people could at¬ 
tain greatly exceeded that to which one could aspire on the basis of income 
from labor alone. Under such conditions, why work? And why behave mor¬ 
ally at all? Since social inequality was in itself immoral and unjustified, why 
not be thoroughly immoral and appropriate capital by whatever means are 
available? 

The detailed income figures Vautrin gives are unimportant (although 
quite realistic): the key fact is that in nineteenth-century France and, for that 
matter, into the early twentieth century, work and study alone were not enough 


240 


INEQUALITY AND CONCENTRATION: PRELIMINARY BEARINGS 


to achieve the same level of comfort afforded by inherited wealth and the in¬ 
come derived from it. This was so obvious to everyone that Balzac needed no 
statistics to prove it, no detailed figures concerning the deciles and centiles of 
the income hierarchy. Conditions were similar, moreover, in eighteenth- and 
nineteenth-century Britain. For Jane Austen’s heroes, the question of work 
did not arise: all that mattered was the size of one’s fortune, whether acquired 
through inheritance or marriage. Indeed, the same was true almost every¬ 
where before World War I, which marked the suicide of the patrimonial 
societies of the past. One of the few exceptions to this rule was the United 
States, or at any rate the various “pioneer” microsocieties in the northern and 
western states, where inherited capital had little influence in the eighteenth 
and nineteenth centuries—a situation that did not last long, however. In the 
southern states, where capital in the form of slaves and land predominated, 
inherited wealth mattered as much as it did in old Europe. In Gone with the 
Wind, Scarlett O’Hara’s suitors cannot count on their studies or talents to 
assure their future comfort any more than Rastignac can: the size of one’s 
father’s (or father-in-law’s) plantation matters far more. Yautrin, to show 
how little he thinks of morality, merit, or social justice, points out to young 
Eugene that he would be glad to end his days as a slave owner in the US 
South, living in opulence on what his Negroes produced. 3 Clearly, the Amer¬ 
ica that appeals to the French ex-convict is not the America that appealed to 
Tocqueville. 

To be sure, income from labor is not always equitably distributed, and it 
would be unfair to reduce the question of social justice to the importance of 
income from labor versus income from inherited wealth. Nevertheless, demo¬ 
cratic modernity is founded on the belief that inequalities based on individ¬ 
ual talent and effort are more justified than other inequalities—or at any rate 
we hope to be moving in that direction. Indeed, Vautrin’s lesson to some ex¬ 
tent ceased to be valid in twentieth-century Europe, at least for a time. Dur¬ 
ing the decades that followed World War II, inherited wealth lost much of its 
importance, and for the first time in history, perhaps, work and study became 
the surest routes to the top. Today, even though all sorts of inequalities have 
reemerged, and many beliefs in social and democratic progress have been 
shaken, most people still believe that the world has changed radically since 
Vautrin lectured Rastignac. Who today would advise a young law student 
to abandon his or her studies and adopt the ex-convict’s strategy for social 


241 


THE STRUCTURE OF INEQUALITY 


advancement? To be sure, there may exist rare cases where a person would be 
well advised to set his or her sights on inheriting a large fortune. 4 In the vast 
majority of cases, however, it is not only more moral but also more profitable 
to rely on study, work, and professional success. 

Vautrin’s lecture focuses our attention on two questions, which I will try 
to answer in the next few chapters with the imperfect data at my disposal. 
First, can we be sure that the relative importance of income from labor versus 
income from inherited wealth has been transformed since the time of Vau- 
trin, and if so, to what extent? Second, and even more important, if we assume 
that such a transformation has to some degree occurred, why exactly did it 
happen, and can it be reversed? 

Inequalities with Respect to Labor and Capital 

To answer these questions, I must first introduce certain basic ideas and the 
fundamental patterns of income and wealth inequality in different societies 
at different times. I showed in Part One that income can always be expressed 
as the sum of income from labor and income from capital. Wages are one 
form of income from labor, and to simplify the exposition I will sometimes 
speak of wage inequality when I mean inequality of income from labor more 
generally. To be sure, income from labor also includes income from nonwage 
labor, which for a long time played a crucial role and still plays a nonnegligible 
role today. Income from capital can also take different forms: it includes all 
income derived from the ownership of capital independent of any labor and 
regardless of its legal classification (rents, dividends, interest, royalties, profits, 
capital gains, etc.). 

By definition, in all societies, income inequality is the result of adding up 
these two components: inequality of income from labor and inequality of in¬ 
come from capital. The more unequally distributed each of these two compo¬ 
nents is, the greater the total inequality. In the abstract, it is perfectly possible 
to imagine a society in which inequality with respect to labor is high and ine¬ 
quality with respect to capital is low, or vice versa, as well as a society in which 
both components are highly unequal or highly egalitarian. 

The third decisive factor is the relation between these two dimensions of 
inequality: to what extent do individuals with high income from labor also 
enjoy high income from capital? Technically speaking, this relation is a statis- 


242 


INEQUALITY AND CONCENTRATION: PRELIMINARY BEARINGS 


tical correlation, and the greater the correlation, the greater the total inequal¬ 
ity, all other things being equal. In practice, the correlation in question is of¬ 
ten low or negative in societies in which inequality with respect to capital is so 
great that the owners of capital do not need to work (for example, Jane Aus¬ 
ten’s heroes usually eschew any profession). How do things stand today, and 
how will they stand in the future? 

Note, too, that inequality of income from capital may be greater than ine¬ 
quality of capital itself, if individuals with large fortunes somehow manage to 
obtain a higher return than those with modest to middling fortunes. This 
mechanism can be a powerful multiplier of inequality, and this is especially 
true in the century that has just begun. In the simple case where the average 
rate of return is the same at all levels of the wealth hierarchy, then by defini¬ 
tion the two inequalities coincide. 

When analyzing the unequal distribution of income, it is essential to care¬ 
fully distinguish these various aspects and components of inequality, first for 
normative and moral reasons (the justification of inequality is quite different 
for income from labor, from inherited wealth, and from differential returns 
on capital), and second, because the economic, social, and political mecha¬ 
nisms capable of explaining the observed evolutions are totally distinct. In 
the case of unequal incomes from labor, these mechanisms include the supply 
of and demand for different skills, the state of the educational system, and the 
various rules and institutions that affect the operation of the labor market 
and the determination of wages. In the case of unequal incomes from capital, 
the most important processes involve savings and investment behavior, laws 
governing gift-giving and inheritance, and the operation of real estate and fi¬ 
nancial markets. The statistical measures of income inequality that one finds 
in the writings of economists as well as in public debate are all too often syn¬ 
thetic indices, such as the Gini coefficient, which mix very different things, 
such as inequality with respect to labor and capital, so that it is impossible to 
distinguish clearly among the multiple dimensions of inequality and the vari¬ 
ous mechanisms at work. By contrast, I will try to distinguish these things as 
precisely as possible. 


243 


THE STRUCTURE OF INEQUALITY 


Capital: Always More Unequally Distributed Than Labor 

The first regularity we observe when we try to measure income inequality in 
practice is that inequality with respect to capital is always greater than ine¬ 
quality with respect to labor. The distribution of capital ownership (and of 
income from capital) is always more concentrated than the distribution of 
income from labor. 

Two points need to be clarified at once. First, we find this regularity in all 
countries in all periods for which data are available, without exception, and 
the magnitude of the phenomenon is always quite striking. To give a prelimi¬ 
nary idea of the order of magnitude in question, the upper io percent of the 
labor income distribution generally receives 25-30 percent of total labor in¬ 
come, whereas the top 10 percent of the capital income distribution always 
owns more than 50 percent of all wealth (and in some societies as much as 90 
percent). Even more strikingly, perhaps, the bottom 50 percent of the wage 
distribution always receives a significant share of total labor income (generally 
between one-quarter and one-third, or approximately as much as the top 10 
percent), whereas the bottom 50 percent of the wealth distribution owns noth¬ 
ing at all, or almost nothing (always less than 10 percent and generally less 
than 5 percent of total wealth, or one-tenth as much as the wealthiest 10 per¬ 
cent). Inequalities with respect to labor usually seem mild, moderate, and al¬ 
most reasonable (to the extent that inequality can be reasonable—this point 
should not be overstated). In comparison, inequalities with respect to capital 
are always extreme. 

Second, this regularity is by no means foreordained, and its existence tells 
us something important about the nature of the economic and social pro¬ 
cesses that shape the dynamics of capital accumulation and the distribution 
of wealth. 

Indeed, it is not difficult to think of mechanisms that would lead to a dis¬ 
tribution of wealth more egalitarian than the distribution of income from la¬ 
bor. For example, suppose that at a given point in time, labor incomes reflect 
not only permanent wage inequalities among different groups of workers 
(based on the skill level and hierarchical position of each group) but also 
short-term shocks (for instance: wages and working hours in different sectors 
might fluctuate considerably from year to year or over the course of an indi¬ 
vidual’s career). Labor incomes would then be highly unequal in the short 


244 


INEQUALITY AND CONCENTRATION: PRELIMINARY BEARINGS 


run, although this inequality would diminish if measured over a long period 
(say ten years rather than one, or even over the lifetime of an individual, al¬ 
though this is rarely done because of the lack of long-term data). A longer- 
term perspective would be ideal for studying the true inequalities of opportu¬ 
nity and status that are the subject of Vautrin’s lecture but are unfortunately 
often quite difficult to measure. 

In a world with large short-term wage fluctuations, the main reason for 
accumulating wealth might be precautionary (as a reserve against a possible 
negative shock to income), in which case inequality of wealth would be 
smaller than wage inequality. For example, inequality of wealth might be of 
the same order of magnitude as the permanent inequality of wage income 
(measured over the length of an individual career) and therefore significantly 
lower than the instantaneous wage inequality (measured at a given point in 
time). All of this is logically possible but clearly not very relevant to the real 
world, since inequality of wealth is always and everywhere much greater than 
inequality of income from labor. Although precautionary saving in anticipa¬ 
tion of short-term shocks does indeed exist in the real world, it is clearly not 
the primary explanation for the observed accumulation and distribution of 
wealth. 

We can also imagine mechanisms that would imply an inequality of wealth 
comparable in magnitude to the inequality of income from labor. Specifically, 
if wealth is accumulated primarily for life-cycle reasons (saving for retire¬ 
ment, say), as Modigliani reasoned, then everyone would be expected to ac¬ 
cumulate a stock of capital more or less proportional to his or her wage level 
in order to maintain approximately the same standard of living (or the same 
proportion thereof) after retirement. In that case, inequality of wealth would 
be a simple translation in time of inequality of income from labor and would 
as such have only limited importance, since the only real source of social ine¬ 
quality would be inequality with respect to labor. 

Once again, such a mechanism is theoretically plausible, and its real-world 
role is of some significance, especially in aging societies. In quantitative terms, 
however, it is not the primary mechanism at work. Life-cycle saving cannot 
explain the very highly concentrated ownership of capital we observe in prac¬ 
tice, any more than precautionary saving can. To be sure, older individuals are 
certainly richer on average than younger ones. But the concentration of wealth 
is actually nearly as great within each age cohort as it is for the population as 


245 


THE STRUCTURE OF INEQUALITY 


a whole. In other words, and contrary to a widespread belief, intergenera- 
tional warfare has not replaced class warfare. The very high concentration of 
capital is explained mainly by the importance of inherited wealth and its cu¬ 
mulative effects: for example, it is easier to save if you inherit an apartment 
and do not have to pay rent. The fact that the return on capital often takes on 
extreme values also plays a significant role in this dynamic process. In the re¬ 
mainder of Part Three, I examine these various mechanisms in greater detail 
and consider how their relative importance has evolved in time and space. At 
this stage, I note simply that the magnitude of inequality of wealth, both in 
absolute terms and relative to inequality of income from labor—points to¬ 
ward certain mechanisms rather than others. 

Inequalities and Concentration: Some Orders of Magnitude 

Before analyzing the historical evolutions that can be observed in different 
countries, it will be useful to give a more precise account of the characteristic 
orders of magnitude of inequality with respect to labor and capital. The goal 
is to familiarize the reader with numbers and notions such as deciles, centiles, 
and the like, which may seem somewhat technical and even distasteful to 
some but are actually quite useful for analyzing and understanding changes 
in the structure of inequality in different societies—provided we use them 
correctly. 

To that end, I have charted in Tables 7.1-3 the distributions actually ob¬ 
served in various countries at various times. The figures indicated are approxi¬ 
mate and deliberately rounded off but at least give us a preliminary idea of 
what the terms “low,” “medium,” and “high” inequality mean today and have 
meant in the past, with respect to both income from labor and ownership of 
capital, and finally with respect to total income (the sum of income from labor 
and income from capital). 

For example, with respect to inequality of income from labor, we find that 
in the most egalitarian societies, such as the Scandinavian countries in the 
1970s and 1980s (inequalities have increased in northern Europe since then, 
but these countries nevertheless remain the least inegalitarian), the distribu¬ 
tion is roughly as follows. Looking at the entire adult population, we see that 
the 10 percent receiving the highest incomes from labor claim a little more 
than zo percent of the total income from labor (and in practice this means 


246 


TABLE 7.1. 


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THE STRUCTURE OF INEQUALITY 


essentially wages); the least well paid 50 percent get about 35 percent of the 
total; and the 40 percent in the middle therefore receive roughly 45 percent of 
the total (see Table 7.1). 5 This is not perfect equality, for in that case each group 
should receive the equivalent of its share of the population (the best paid 10 
percent should get exactly 10 percent of the income, and the worst paid 30 per¬ 
cent should get 50 percent). But the inequality we see here is not too extreme, 
at least in comparison to what we observe in other countries or at other times, 
and it is not too extreme especially when compared with what we find almost 
everywhere for the ownership of capital, even in the Scandinavian countries. 

In order to have a clear idea of what these figures really mean, we need to 
relate distributions expressed as percentages of total income to the paychecks 
that flesh-and-blood workers actually receive as well as to the fortunes in real 
estate and financial assets owned by the people who actually make up these 
wealth hierarchies. 

Concretely, if the best paid 10 percent receive 20 percent of total wages, 
then it follows mathematically that each person in this group earns on aver¬ 
age twice the average pay in the country in question. Similarly, if the least well 
paid 30 percent receive 35 percent of total wages, it follows that each person in 
this group earns on average 70 percent of the average wage. And if the middle 
40 percent receive 45 percent of the total wage, this means that the average 
wage of this group is slightly higher than the average pay for society as a whole 
(45/40 of the average, to be precise). 

For example, if the average pay in a country is 2,000 euros per month, 
then this distribution implies that the top 10 percent earn 4,000 euros a 
month on average, the bottom 50 percent 1,400 euros a month, and the mid¬ 
dle 40 percent 2,250 a month. 6 This intermediate group may be regarded as a 
vast “middle class” whose standard of living is determined by the average wage 
of the society in question. 

Lower, Middle, and Upper Classes 

To be clear, the designations “lower class” (defined as the bottom 50 percent), 
“middle class” (the middle 40 percent), and “upper class” (top 10 percent) that 
I use in Tables 7.1-3 are quite obviously arbitrary and open to challenge. I in¬ 
troduce these terms purely for illustrative purposes, to pin down my ideas, but 
in fact they play virtually no role in the analysis, and I might just as well have 


250 


INEQUALITY AND CONCENTRATION: PRELIMINARY BEARINGS 


called them “Class A,” “Class B,” and “Class C.” In political debate, however, 
such terminological issues are generally far from innocent. The way the popu¬ 
lation is divided up usually reflects an implicit or explicit position concerning 
the justice and legitimacy of the amount of income or wealth claimed by a 
particular group. 

For example, some people use the term “middle class” very broadly to en¬ 
compass individuals who clearly fall within the upper decile (that is, the top 
io percent) of the social hierarchy and who may even be quite close to the up¬ 
per centile (the top i percent). Generally, the purpose of such a broad defini¬ 
tion of the middle class is to insist that even though such individuals dispose 
of resources considerably above the average for the society in question, they 
nevertheless retain a certain proximity to the average: in other words, the 
point is to say that such individuals are not privileged and fully deserve the 
indulgence of the government, particularly in regard to taxes. 

Other commentators reject any notion of “middle class” and prefer to de¬ 
scribe the social structure as consisting of just two groups: “the people,” who 
constitute the vast minority, and a tiny “elite” or “upper class.” Such a descrip¬ 
tion may be accurate for some societies, or it may be applicable to certain po¬ 
litical or historical contexts. For example, in France in 1789, it is generally es¬ 
timated that the aristocracy represented 1-2 percent of the population, the 
clergy less than 1 percent, and the “Third Estate,” meaning (under the politi¬ 
cal system of the Ancien Regime) all the rest, from peasantry to bourgeoisie, 
more than 97 percent. 

It is not my purpose to police dictionaries or linguistic usage. When it 
comes to designating social groups, everyone is right and wrong at the same 
time. Everyone has good reasons for using certain terms but is wrong to deni¬ 
grate the terms used by others. My definition of “middle class” (as the “mid¬ 
dle” 40 percent) is highly contestable, since the income (or wealth) of everyone 
in the group is, by construction, above the median for the society in question. 7 
One might equally well choose to divide society into three thirds and call the 
middle third the “middle class.” Still, the definition I have given seems to me 
to correspond more closely to common usage: the expression “middle class” is 
generally used to refer to people who are doing distinctly better than the bulk 
of the population yet still a long way from the true “elite.” Yet all such desig¬ 
nations are open to challenge, and there is no need for me to take a position 
on this delicate issue, which is not just linguistic but also political. 


251 


THE STRUCTURE OF INEQUALITY 


The truth is that any representation of inequality that relies on a small 
number of categories is doomed to be crudely schematic, since the underlying 
social reality is always a continuous distribution. At any given level of wealth 
or income there is always a certain number of flesh-and-blood individuals, 
and the number of such individuals varies slowly and gradually in accordance 
with the shape of the distribution in the society in question. There is never a 
discontinuous break between social classes or between “people” and “elite.” 
For that reason, my analysis is based entirely on statistical concepts such as 
deciles (top io percent, middle 40 percent, lower 50 percent, etc.), which are 
defined in exactly the same way in different societies. This allows me to make 
rigorous and objective comparisons across time and space without denying 
the intrinsic complexity of each particular society or the fundamentally con¬ 
tinuous structure of social inequality. 

Class Struggle or Centile Struggle? 

My fundamental goal is to compare the structure of inequality in societies 
remote from one another in time and space, societies that are very different a 
priori, and in particular societies that use totally different words and concepts 
to refer to the social groups that compose them. The concepts of deciles and 
centiles are rather abstract and undoubtedly lack a certain poetry. It is easier 
for most people to identify with groups with which they are familiar: peas¬ 
ants or nobles, proletarians or bourgeois, office workers or top managers, 
waiters or traders. But the beauty of deciles and centiles is precisely that they 
enable us to compare inequalities that would otherwise be incomparable, us¬ 
ing a common language that should in principle be acceptable to everyone. 

When necessary, we will break down our groups even more finely, using 
centiles or even thousandths to register more precisely the continuous charac¬ 
ter of social inequality. Specifically, in every society, even the most egalitarian, 
the upper decile is truly a world unto itself. It includes some people whose in¬ 
come is just two or three times greater than the mean and others whose re¬ 
sources are ten or twenty times greater, if not more. To start with, it is always 
enlightening to break the top decile down into two subgroups: the upper 
centile (which we might call the “dominant class” for the sake of concreteness, 
without claiming that this term is better than any other) and the remaining 
nine centiles (which we might call the “wealthy class” or “well-to-do”). 


252 


INEQUALITY AND CONCENTRATION: PRELIMINARY BEARINGS 


For example, if we look at the case where inequality of income from labor 
is relatively low (think Scandinavia), represented in Table 7.1, with 20 percent 
of wages going to the best paid 10 percent of workers, we find that the share 
going to the top 1 percent is typically on the order of 5 percent of total wages. 
This means that the top 1 percent of earners make on average five times the 
mean wage, or 10,000 euros per month, in a society in which the average wage 
is 2,000 euros per month. In other words, the best paid 10 percent earn 4,000 
euros a month on average, but within that group the top 1 percent earn an 
average of 10,000 euros a month (and the next 9 percent earn on average 3,330 
euros a month). If we break this down even further and looked at the top 
thousandth (the best paid 0.1 percent) in the top centile, we find individuals 
earning tens of thousands of euros a month and a few earning hundreds of 
thousands, even in the Scandinavian countries in the 1970s and 1980s. Of 
course there would not be many such people, so their weight in the sum total 
of all wages would be relatively small. 

Thus to judge the inequality of a society, it is not enough to observe that 
some individuals earn very high incomes. For example, to say that the “income 
scale goes from 1 to 10” or even “1 to 100” does not actually tell us very much. 
We also need to know how many people earn the incomes at each level. The 
share of income (or wealth) going to the top decile or centile is a useful index 
for judging how unequal a society is, because it reflects not just the existence 
of extremely high incomes or extremely large fortunes but also the number of 
individuals who enjoy such rewards. 

The top centile is a particularly interesting group to study in the context of 
my historical investigation. Although it constitutes (by definition) a very 
small minority of the population, it is nevertheless far larger than the supere¬ 
lites of a few dozen or hundred individuals on whom attention is sometimes 
focused (such as the “200 families” of France, to use the designation widely 
applied in the interwar years to the 200 largest stockholders of the Banque de 
France, or the “400 richest Americans” or similar rankings established by 
magazines like Forbes). In a country of almost 65 million people such as France 
in 2013, of whom some 50 million are adults, the top centile comprises some 
500,000 people. In a country of 320 million like the United States, of whom 
260 million are adults, the top centile consists of 2 .6 million individuals. 
These are numerically quite large groups who inevitably stand out in society, 
especially when the individuals included in them tend to live in the same cities 


253 


THE STRUCTURE OF INEQUALITY 


and even to congregate in the same neighborhoods. In every country the up¬ 
per centile occupies a prominent place in the social landscape and not just in 
the income distribution. 

Thus in every society, whether France in 1789 (when 1-2 percent of the 
population belonged to the aristocracy) or the United States in 2011 (when 
the Occupy Wall Street movement aimed its criticism at the richest 1 percent 
of the population), the top centile is a large enough group to exert a significant 
influence on both the social landscape and the political and economic order. 

This shows why deciles and centiles are so interesting to study. How could 
one hope to compare inequalities in societies as different as France in 1789 
and the United States in 2011 other than by carefully examining deciles and 
centiles and estimating the shares of national wealth and income going to 
each? To be sure, this procedure will not allow us to eliminate every problem 
or settle every question, but at least it will allow us to say something—and 
that is far better than not being able to say anything at all. We can therefore 
try to determine whether “the 1 percent” had more power under Louis XVI or 
under George Bush and Barack Obama. 

To return for a moment to the Occupy Wall Street movement, what it 
shows is that the use of a common terminology, and in particular the concept 
of the “top centile,” though it may at first glance seem somewhat abstract, can 
be helpful in revealing the spectacular growth of inequality and may there¬ 
fore serve as a useful tool for social interpretation and criticism. Even mass 
social movements can avail themselves of such a tool to develop unusual mo¬ 
bilizing themes, such as “We are the 99 percent!” This might seem surprising 
at first sight, until we remember that the title of the famous pamphlet that 
Abbe Sieyes published in January 1789 was “What Is the Third Estate?” 8 

I should also make it clear that the hierarchies (and therefore centiles and 
deciles) of income are not the same as those of wealth. The top 10 percent or 
bottom 50 percent of the labor income distribution are not the same people 
who constitute the top 10 percent or bottom 50 percent of the wealth distri¬ 
bution. The “1 percent” who earn the most are not the same as the “1 percent” 
who own the most. Deciles and centiles are defined separately for income 
from labor, ownership of capital, and total income (from both labor and capi¬ 
tal), with the third being a synthesis of the first two dimensions and thus de¬ 
fining a composite social hierarchy. It is always essential to be clear about 
which hierarchy one is referring to. In traditional societies, the correlation 


254 


INEQUALITY AND CONCENTRATION: PRELIMINARY BEARINGS 


between the two dimensions was often negative (because people with large 
fortunes did not work and were therefore at the bottom of the labor income 
hierarchy). In modern societies, the correlation is generally positive but never 
perfect (the coefficient of correlation is always less than one). For example, 
many people belong to the upper class in terms of labor income but to the 
lower class in terms of wealth, and vice versa. Social inequality is multidimen¬ 
sional, just like political conflict. 

Note, finally, that the income and wealth distributions described in Ta¬ 
bles 7.1-3 and analyzed in this and subsequent chapters are in all cases “pri¬ 
mary” distributions, meaning before taxes. Depending on whether the tax 
system (and the public services and transfer payments it finances) is “progres¬ 
sive” or “regressive” (meaning that it weighs more or less heavily on different 
groups depending on whether they stand high or low in the income or wealth 
hierarchy), the after-tax distribution may be more or less egalitarian than the 
before-tax distribution. I will come back to this in Part Four, along with many 
other questions related to redistribution. At this stage only the before-tax 
distribution requires consideration. 9 

Inequalities with Respect to Labor: Moderate Inequality? 

To return to the question of orders of magnitude of inequality: To what ex¬ 
tent are inequalities of income from labor moderate, reasonable, or even no 
longer an issue today? It is true that inequalities with respect to labor are al¬ 
ways much smaller than inequalities with respect to capital. It would be quite 
wrong, however, to neglect them, first because income from labor generally 
accounts for two-thirds to three-quarters of national income, and second be¬ 
cause there are quite substantial differences between countries in the distribu¬ 
tion of income from labor, which suggests that public policies and national 
differences can have major consequences for these inequalities and for the 
living conditions of large numbers of people. 

In countries where income from labor is most equally distributed, such as 
the Scandinavian countries between 1970 and 1990, the top 10 percent of earn¬ 
ers receive about 20 percent of total wages and the bottom 50 percent about 35 
percent. In countries where wage inequality is average, including most Euro¬ 
pean countries (such as France and Germany) today, the first group claims 
25-30 percent of total wages, and the second around 30 percent. And in the 


255 


THE STRUCTURE OF INEQUALITY 


most inegalitarian countries, such as the United States in the early 2010s 
(where, as will emerge later, income from labor is about as unequally distrib¬ 
uted as has ever been observed anywhere), the top decile gets 35 percent of the 
total, whereas the bottom half gets only 25 percent. In other words, the equi¬ 
librium between the two groups is almost completely reversed. In the most 
egalitarian countries, the bottom 30 percent receive nearly twice as much to¬ 
tal income as the top 10 percent (which some will say is still too little, since 
the former group is five times as large as the latter), whereas in the most ine¬ 
galitarian countries the bottom 30 percent receive one-third less than the top 
group. If the growing concentration of income from labor that has been 
observed in the United States over the last few decades were to continue, the 
bottom 50 percent could earn just half as much in total compensation as the 
top 10 percent by 2030 (see Table 7.1). Obviously there is no certainty that this 
evolution will in fact continue, but the point illustrates the fact that recent 
changes in the income distribution have by no means been painless. 

In concrete terms, if the average wage is 2,000 euros a month, the egalitar¬ 
ian (Scandinavian) distribution corresponds to 4,000 euros a month for the 
top 10 percent of earners (and 10,000 for the top 1 percent), 2,250 a month for 
the 40 percent in the middle, and 1,400 a month for the bottom 50 percent, 
where the more inegalitarian (US) distribution corresponds to a markedly 
steeper hierarchy: 7,000 euros a month for the top 10 percent (and 24,000 for 
the top 1 percent), 2,000 for the middle 40 percent, and just 1,000 for the bot¬ 
tom 50 percent. 

For the least-favored half of the population, the difference between the 
two income distributions is therefore far from negligible: if a person earns 
1,400 euros a month instead of 1,000—40 percent additional income—even 
leaving taxes and transfers aside, the consequences for lifestyle choices, hous¬ 
ing, vacation opportunities, and money to spend on projects, children, and so 
on are considerable. In most countries, moreover, women are in fact signifi¬ 
cantly overrepresented in the bottom 50 percent of earners, so that these large 
differences between countries reflect in part differences in the male-female 
wage gap, which is smaller in northern Europe than elsewhere. 

The gap between the two distributions is also significant for the top¬ 
earning group: a person who all his or her life earns 7,000 euros a month 
rather than 4,000 (or, even better, 24,000 instead of 10,000), will not spend 
money on the same things and will have greater power not only over what he 


256 


INEQUALITY AND CONCENTRATION: PRELIMINARY BEARINGS 


or she buys but also over other people: for instance, this person can hire less 
well paid individuals to serve his or her needs. If the trend observed in the 
United States were to continue, then by 2030 the top 10 percent of earners 
will be making 9,000 euros a month (and the top 1 percent, 34,000 euros), 
the middle 40 percent will earn 1,750, and the bottom 50 percent just 800 a 
month. The top 10 percent could therefore use a small portion of their in¬ 
comes to hire many of the bottom 50 percent as domestic servants . 10 

Clearly, then, the same mean wage is compatible with very different distri¬ 
butions of income from labor, which can result in very disparate social and 
economic realities for different social groups. In some cases, these inequalities 
may give rise to conflict. It is therefore important to understand the eco¬ 
nomic, social, and political forces that determine the degree of labor income 
inequality in different societies. 

Inequalities with Respect to Capital: Extreme Inequality 

Although inequality with respect to income from labor is sometimes seen— 
incorrectly—as moderate inequality that no longer gives rise to conflict, this 
is largely a consequence of comparing it with the distribution of capital own¬ 
ership, which is extremely inegalitarian everywhere (see Table 7.2). 

In the societies where wealth is most equally distributed (once again, the 
Scandinavian countries in the 1970s and 1980s), the richest 10 percent own 
around 50 percent of national wealth or even a bit more, somewhere between 
50 and 60 percent, if one properly accounts for the largest fortunes. Currently, 
in the early 2010s, the richest 10 percent own around 60 percent of national 
wealth in most European countries, and in particular in France, Germany, 
Britain, and Italy. 

The most striking fact is no doubt that in all these societies, half of the 
population own virtually nothing: the poorest 50 percent invariably own less 
than 10 percent of national wealth, and generally less than 5 percent. In 
France, according to the latest available data (for 2010-2011), the richest 10 
percent command 62 percent of total wealth, while the poorest 50 percent 
own only 4 percent. In the United States, the most recent survey by the 
Federal Reserve, which covers the same years, indicates that the top decile 
own 72 percent of America’s wealth, while the bottom half claim just 2 per¬ 
cent. Note, however, that this source, like most surveys in which wealth is 


257 


THE STRUCTURE OF INEQUALITY 


self-reported, underestimates the largest fortunes . 11 As noted, moreover, it is 
also important to add that we find the same concentration of wealth within 
each age cohort . 12 

Ultimately, inequalities of wealth in the countries that are most egalitar¬ 
ian in that regard (such as the Scandinavian countries in the 1970s and 1980s) 
appear to be considerably greater than wage inequalities in the countries that 
are most inegalitarian with respect to wages (such as the United States in the 
early 2010s: see Tables 7.1 and 7.2). To my knowledge, no society has ever ex¬ 
isted in which ownership of capital can reasonably be described as “mildly” 
inegalitarian, by which I mean a distribution in which the poorest half of 
society would own a significant share (say, one-fifth to one-quarter) of total 
wealth. 13 Optimism is not forbidden, however, so I have indicated in Table 7.2 
a virtual example of a possible distribution of wealth in which inequality 
would be “low,” or at any rate lower than it is in Scandinavia (where it is “me¬ 
dium”), Europe (“medium-to-high”), or the United States (“high”). Of course, 
how one might go about establishing such an “ideal society”—assuming that 
such low inequality of wealth is indeed a desirable goal—remains to be seen (I 
will return to this central question in Part Four). 14 

As in the case of wage inequality, it is important to have a good grasp of 
exactly what these wealth figures mean. Imagine a society in which average 
net wealth is 200,000 euros per adult, 15 which is roughly the case today in the 
richest European countries. 16 As noted in Part Two, this private wealth can be 
divided into two roughly equal parts: real estate on the one hand and finan¬ 
cial and business assets on the other (these include bank deposits, savings 
plans, portfolios of stocks and bonds, life insurance, pension funds, etc., net 
of debts). Of course these are average figures, and there are large variations 
between countries and enormous variations between individuals. 

If the poorest 50 percent own 5 percent of total wealth, then by definition 
each member of that group owns on average the equivalent of 10 percent of the 
average individual wealth of society as a whole. In the example in the previous 
paragraph, it follows that each person among the poorest 50 percent possesses 
on average a net wealth of 20,000 euros. This is not nothing, but it is very lit¬ 
tle compared with the wealth of the rest of society. 

Concretely, in such a society, the poorest half of the population will 
generally comprise a large number of people—typically a quarter of the 
population—with no wealth at all or perhaps a few thousand euros at most. 


258 


INEQUALITY AND CONCENTRATION: PRELIMINARY BEARINGS 


Indeed, a nonnegligible number of people—perhaps one-twentieth to one- 
tenth of the population—will have slightly negative net wealth (their debts 
exceed their assets). Others will own small amounts of wealth up to about 
6 0,000 or 70,000 euros or perhaps a bit more. This range of situations, in¬ 
cluding the existence of a large number of people with very close to zero ab¬ 
solute wealth, results in an average wealth of about 20,000 euros for the 
poorest half of the population. Some of these people may own real estate 
that remains heavily indebted, while others may possess very small nest eggs. 
Most, however, are renters whose only wealth consists of a few thousand eu¬ 
ros of savings in a checking or savings account. If we included durable goods 
such as cars, furniture, appliances, and the like in wealth, then the average 
wealth of the poorest 50 percent would increase to no more than 30,000 or 
40,000 euros. 17 

For this half of the population, the very notions of wealth and capital are 
relatively abstract. For millions of people, “wealth” amounts to little more than 
a few weeks’ wages in a checking account or low-interest savings account, a 
car, and a few pieces of furniture. The inescapable reality is this: wealth is so 
concentrated that a large segment of society is virtually unaware of its exis¬ 
tence, so that some people imagine that it belongs to surreal or mysterious 
entities. That is why it is so essential to study capital and its distribution in a 
methodical, systematic way. 

At the other end of the scale, the richest 10 percent own 60 percent of to¬ 
tal wealth. It therefore follows that each member of this group owns on aver¬ 
age 6 times the average wealth of the society in question. In the example, with 
an average wealth of 200,000 euros per adult, each of the richest 10 percent 
therefore owns on average the equivalent of 1.2 million euros. 

The upper decile of the wealth distribution is itself extremely unequal, 
even more so than the upper decile of the wage distribution. When the upper 
decile claims about 60 percent of total wealth, as is the case in most European 
countries today, the share of the upper centile is generally around 25 percent 
and that of the next 9 percent of the population is about 35 percent. The mem¬ 
bers of the first group are therefore on average 23 times as rich as the average 
member of society, while the members of the second group are barely 4 times 
richer. Concretely, in the example, the average wealth of the top 10 percent is 
1.2 million euros each, with 5 million euros each for the top 1 percent and a 
little less than 800,000 each for the next 9 percent. 18 


259 


THE STRUCTURE OF INEQUALITY 


In addition, the composition of wealth varies widely within this group. 
Nearly everyone in the top decile owns his or her own home, but the importance 
of real estate decreases sharply as one moves higher in the wealth hierarchy. In 
the “9 percent” group, at around 1 million euros, real estate accounts for half of 
total wealth and for some individuals more than three-quarters. In the top cen- 
tile, by contrast, financial and business assets clearly predominate over real estate. 
In particular, shares of stock or partnerships constitute nearly the totality of the 
largest fortunes. Between 1 and 5 million euros, the share of real estate is less than 
one-third; above 5 million euros, it falls below 20 percent; above 10 million eu¬ 
ros, it is less than 10 percent and wealth consists primarily of stock. Housing is 
the favorite investment of the middle class and moderately well-to-do, but true 
wealth always consists primarily of financial and business assets. 

Between the poorest 50 percent (who own 5 percent of total wealth, or an 
average of 20,000 euros each in the example) and the richest 10 percent (who 
own 60 percent of total wealth, or an average of 1.2 million euros each) lies the 
middle 40 percent: this “middle class of wealth” owns 35 percent of total na¬ 
tional wealth, which means that their average net wealth is fairly close to the 
average for society as a whole—in the example, it comes to exactly 175,000 euros 
per adult. Within this vast group, where individual wealth ranges from barely 
100,000 euros to more than 400,000, a key role is often played by ownership of 
a primary residence and the way it is acquired and paid for. Sometimes, in addi¬ 
tion to a home, there is also a substantial amount of savings. For example, a net 
capital of 200,000 euros may consist of a house valued at 250,000 euros, from 
which an outstanding mortgage balance of 100,000 euros must be deducted, 
together with savings of 50,000 euros invested in a life insurance policy or re¬ 
tirement savings account. When the mortgage is fully paid off, net wealth in 
this case will rise to 300,000 euros, or even more if the savings account has 
grown in the meantime. This is a typical trajectory in the middle class of the 
wealth hierarchy, who are richer than the poorest 50 percent (who own practi¬ 
cally nothing) but poorer than the richest 10 percent (who own much more). 

A Major Innovation: The Patrimonial Middle Class 

Make no mistake: the growth of a true “patrimonial (or propertied) middle 
class” was the principal structural transformation of the distribution of 
wealth in the developed countries in the twentieth century. 


260 


INEQUALITY AND CONCENTRATION: PRELIMINARY BEARINGS 


To go back a century in time, to the decade 19 00-1910: in all the countries 
of Europe, the concentration of capital was then much more extreme than it is 
today. It is important to bear in mind the orders of magnitude indicated in 
Table 7.2. In this period in France, Britain, and Sweden, as well as in all other 
countries for which we have data, the richest 10 percent owned virtually all of 
the nation’s wealth: the share owned by the upper decile reached 90 percent. 
The wealthiest 1 percent alone owned more than 50 percent of all wealth. The 
upper centile exceeded 60 percent in some especially inegalitarian countries, 
such as Britain. On the other hand, the middle 40 percent owned just over 5 
percent of national wealth (between 5 and 10 percent depending on the coun¬ 
try), which was scarcely more than the poorest 50 percent, who then as now 
owned less than 5 percent. 

In other words, there was no middle class in the specific sense that the middle 
40 percent of the wealth distribution were almost as poor as the bottom 50 per¬ 
cent. The vast majority of people owned virtually nothing, while the lion’s share 
of society’s assets belonged to a minority. To be sure, this was not a tiny minority: 
the upper decile comprised an elite far larger than the upper centile, which even 
so included a substantial number of people. Nevertheless, it was a minority. Of 
course, the distribution curve was continuous, as it is in all societies, but its slope 
was extremely steep in the neighborhood of the top decile and centile, so that 
there was an abrupt transition from the world of the poorest 90 percent (whose 
members had at most a few tens of thousands of euros’ worth of wealth in today’s 
currency) to that of the richest 10 percent, whose members owned the equivalent 
of several million euros or even tens of millions of euros. 19 

The emergence of a patrimonial middle class was an important, if fragile, 
historical innovation, and it would be a serious mistake to underestimate it. 
To be sure, it is tempting to insist on the fact that wealth is still extremely 
concentrated today: the upper decile own 60 percent of Europe’s wealth and 
more than 70 percent in the United States. 20 And the poorer half of the popu¬ 
lation are as poor today as they were in the past, with barely 5 percent of total 
wealth in 2010, just as in 1910. Basically, all the middle class managed to get its 
hands on was a few crumbs: scarcely more than a third of Europe’s wealth and 
barely a quarter in the United States. This middle group has four times as 
many members as the top decile yet only one-half to one-third as much 
wealth. It is tempting to conclude that nothing has really changed: inequali¬ 
ties in the ownership of capital are still extreme (see Table 7.2). 


261 


THE STRUCTURE OF INEQUALITY 


None of this is false, and it is essential to be aware of these things: the 
historical reduction of inequalities of wealth is less substantial than many 
people believe. Furthermore, there is no guarantee that the limited com¬ 
pression of inequality that we have seen is irreversible. Nevertheless, the 
crumbs that the middle class has collected are important, and it would be 
wrong to underestimate the historical significance of the change. A person 
who has a fortune of 100,000 to 300,000 euros may not be rich but is a long 
way from being destitute, and most of these people do not like to be treated 
as poor. Tens of millions of individuals—40 percent of the population rep¬ 
resents a large group, intermediate between rich and poor—individually 
own property worth hundreds of thousands of euros and collectively lay 
claim to one-quarter to one-third of national wealth: this is a change of 
some moment. In historical terms, it was a major transformation, which 
deeply altered the social landscape and the political structure of society and 
helped to redefine the terms of distributive conflict. It is therefore essential 
to understand why it occurred. 

The rise of a propertied middle class was accompanied by a very sharp de¬ 
crease in the wealth share of the upper centile, which fell by more than half, 
going from more than 50 percent in Europe at the turn of the twentieth cen¬ 
tury to around 20-15 percent at the end of that century and beginning of the 
next. As we will see, this partly invalidated Vautrin’s lesson, in that the num¬ 
ber of fortunes large enough to allow a person to live comfortably on annual 
rents decreased dramatically: an ambitious young Rastignac could no longer 
live better by marrying Mademoiselle Victorine than by studying law. This 
was historically important, because the extreme concentration of wealth in 
Europe around 1900 was in fact characteristic of the entire nineteenth cen¬ 
tury. All available sources agree that these orders of magnitude—90 percent 
of wealth for the top decile and at least 50 percent for the top centile—were 
also characteristic of traditional rural societies, whether in Ancien Regime 
France or eighteenth-century England. Such concentration of capital is in fact 
a necessary condition for societies based on accumulated and inherited wealth, 
such as those described in the novels of Austen and Balzac, to exist and pros¬ 
per. Hence one of the main goals of this book is to understand the conditions 
under which such concentrated wealth can emerge, persist, vanish, and per¬ 
haps reappear. 


262 


INEQUALITY AND CONCENTRATION: PRELIMINARY BEARINGS 


Inequality of Total Income: Two Worlds 

Finally, let us turn now to inequality of total income, that is, of income from 
both labor and capital (see Table 7.3). Unsurprisingly, the level of inequality of 
total income falls between inequality of income from labor and inequality of 
ownership of capital. Note, too, that inequality of total income is closer to in¬ 
equality of income from labor than to inequality of capital, which comes as 
no surprise, since income from labor generally accounts for two-thirds to 
three-quarters of total national income. Concretely, the top decile of the in¬ 
come hierarchy received about 25 percent of national income in the egalitarian 
societies of Scandinavia in the 1970s and 1980s (it was 30 percent in Germany 
and France at that time and is more than 35 percent now). In more inegalitar¬ 
ian societies, the top decile claimed as much as 50 percent of national income 
(with about 20 percent going to the top centile). This was true in France and 
Britain during the Ancien Regime as well as the Belle Fpoque and is true in 
the United States today. 

Is it possible to imagine societies in which the concentration of income is 
much greater? Probably not. If, for example, the top decile appropriates 90 
percent of each year’s output (and the top centile took 50 percent just for it¬ 
self, as in the case of wealth), a revolution will likely occur, unless some pecu¬ 
liarly effective repressive apparatus exists to keep it front happening. When it 
comes to the ownership of capital, such a high degree of concentration is 
already a source of powerful political tensions, which are often difficult to 
reconcile with universal suffrage. Yet such capital concentration might be 
tenable if the income from capital accounts for only a small part of national 
income: perhaps one-fourth to one-third, or sometimes a bit more, as in the 
Ancien Regime (which made the extreme concentration of wealth at that 
time particularly oppressive). But if the same level of inequality applies to the 
totality of national income, it is hard to imagine that those at the bottom will 
accept the situation permanently. 

That said, there are no grounds for asserting that the upper decile can 
never claim more than 30 percent of national income or that a country’s 
economy would collapse if this symbolic threshold were crossed. In fact, the 
available historical data are far from perfect, and it is not out of the ques¬ 
tion that this symbolic limit has already been exceeded. In particular, it is 
possible that under the Ancien Regime, right up to the eve of the French 


263 


THE STRUCTURE OF INEQUALITY 


Revolution, the top decile did take more than 50 percent and even as much 
as 60 percent or perhaps slightly more of national income. More generally, 
this may have been the case in other traditional rural societies. Indeed, 
whether such extreme inequality is or is not sustainable depends not only 
on the effectiveness of the repressive apparatus but also, and perhaps pri¬ 
marily, on the effectiveness of the apparatus of justification. If inequalities 
are seen as justified, say because they seem to be a consequence of a choice 
by the rich to work harder or more efficiently than the poor, or because pre¬ 
venting the rich from earning more would inevitably harm the worst-off 
members of society, then it is perfectly possible for the concentration of in¬ 
come to set new historical records. That is why I indicate in Table 7.3 that 
the United States may set a new record around 1030 if inequality of income 
from labor—and to a lesser extent inequality of ownership of capital— 
continue to increase as they have done in recent decades. The top decile 
would them claim about 60 percent of national income, while the bottom 
half would get barely 15 percent. 

I want to insist on this point: the key issue is the justification of inequali¬ 
ties rather than their magnitude as such. That is why it is essential to analyze 
the structure of inequality. In this respect, the principal message of Tables 
7.1-3 is surely that there are two different ways for a society to achieve a very 
unequal distribution of total income (around 30 percent for the top decile 
and zo percent for the top centile). 

The first of these two ways of achieving such high inequality is through a 
“hyperpatrimonial society” (or “society of rentiers”): a society in which inher¬ 
ited wealth is very important and where the concentration of wealth attains 
extreme levels (with the upper decile owning typically 90 percent of all 
wealth, with 30 percent belonging to the upper centile alone). The total in¬ 
come hierarchy is then dominated by very high incomes from capital, espe¬ 
cially inherited capital. This is the pattern we see in Ancien Regime France 
and in Europe during the Belle Epoque, with on the whole minor variations. 
We need to understand how such structures of ownership and inequality 
emerged and persisted and to what extent they belong to the past—unless of 
course they are also pertinent to the future. 

The second way of achieving such high inequality is relatively new. It 
was largely created by the United States over the past few decades. Here we 
see that a very high level of total income inequality can be the result of a 


264 


INEQUALITY AND CONCENTRATION: PRELIMINARY BEARINGS 


“hypermeritocratic society” (or at any rate a society that the people at the 
top like to describe as hypermeritocratic). One might also call this a “soci¬ 
ety of superstars” (or perhaps “supermanagers,” a somewhat different char¬ 
acterization). In other words, this is a very inegalitarian society, but one in 
which the peak of the income hierarchy is dominated by very high incomes 
from labor rather than by inherited wealth. I want to be clear that at this 
stage I am not making a judgment about whether a society of this kind re¬ 
ally deserves to be characterized as “hypermeritocratic.” It is hardly surpris¬ 
ing that the winners in such a society would wish to describe the social hier¬ 
archy in this way, and sometimes they succeed in convincing some of the 
losers. For present purposes, however, hypermeritocracy is not a hypothesis 
but one possible conclusion of the analysis—bearing in mind that the op¬ 
posite conclusion is equally possible. I will analyze in what follows how far 
the rise of labor income inequality in the United States has obeyed a “meri¬ 
tocratic” logic (insofar as it is possible to answer such a complex normative 
question). 

At this point it will suffice to note that the stark contrast I have drawn 
here between two types of hyperinegalitarian society—a society of rentiers 
and a society of supermanagers—is naive and overdrawn. The two types of 
inequality can coexist: there is no reason why a person can’t be both a super¬ 
manager and a rentier—and the fact that the concentration of wealth is cur¬ 
rently much higher in the United States than in Europe suggests that this 
may well be the case in the United States today. And of course there is noth¬ 
ing to prevent the children of supermanagers from becoming rentiers. In 
practice, we find both logics at work in every society. Nevertheless, there is 
more than one way of achieving the same level of inequality, and what pri¬ 
marily characterizes the United States at the moment is a record level of ine¬ 
quality of income from labor (probably higher than in any other society at 
any time in the past, anywhere in the world, including societies in which skill 
disparities were extremely large) together with a level of inequality of wealth 
less extreme than the levels observed in traditional societies or in Europe in 
the period 1900-1910. It is therefore essential to understand the conditions 
under which each of these two logics could develop, while keeping in mind 
that they may complement each other in the century ahead and combine their 
effects. If this happens, the future could hold in store a new world of inequal¬ 
ity more extreme than any that preceded it. 21 


265 


THE STRUCTURE OF INEQUALITY 


Problems of Synthetic Indices 

Before turning to a country-by-country examination of the historical evolu¬ 
tion of inequality in order to answer the questions posed above, several meth¬ 
odological issues remain to be discussed. In particular, Tables 7.1-3 include 
indications of the Gini coefficients of the various distributions considered. The 
Gini coefficient—named for the Italian statistician Corrado Gini (1884— 
1965)—is one of the more commonly used synthetic indices of inequality, fre¬ 
quently found in official reports and public debate. By construction, it ranges 
from o to 1: it is equal to o in case of complete equality and to 1 when inequal¬ 
ity is absolute, that is, when a very tiny group owns all available resources. 

In practice, the Gini coefficient varies from roughly 0.2. to 0.4 in the dis¬ 
tributions of labor income observed in actual societies, from 0.6 to 0.9 for 
observed distributions of capital ownership, and from 0.3 to 0.5 for total in¬ 
come inequality. In Scandinavia in the 1970s and 1980s, the Gini coefficient 
of the labor income distribution was 0.19, not far from absolute equality. 
Conversely, the wealth distribution in Belle Epoque Europe exhibited a Gini 
coefficient of 0.83, not far from absolute inequality. 22 

These coefficients—and there are others, such as the Theil index—are 
sometimes useful, but they raise many problems. They claim to summarize in 
a single numerical index all that a distribution can tell us about inequality— 
the inequality between the bottom and the middle of the hierarchy as well as 
between the middle and the top or between the top and the very top. This is 
very simple and appealing at first glance but inevitably somewhat misleading. 
Indeed, it is impossible to summarize a multidimensional reality with a uni¬ 
dimensional index without unduly simplifying matters and mixing up things 
that should not be treated together. The social reality and economic and po¬ 
litical significance of inequality are very different at different levels of the 
distribution, and it is important to analyze these separately. In addition, Gini 
coefficients and other synthetic indices tend to confuse inequality in regard 
to labor with inequality in regard to capital, even though the economic mech¬ 
anisms at work, as well as the normative justifications of inequality, are very 
different in the two cases. For all these reasons, it seemed to me far better to 
analyze inequalities in terms of distribution tables indicating the shares of 
various deciles and centiles in total income and total wealth rather than using 
synthetic indices such as the Gini coefficient. 


266 


INEQUALITY AND CONCENTRATION: PRELIMINARY BEARINGS 


Distribution tables are also valuable because they force everyone to take 
note of the income and wealth levels of the various social groups that make up 
the existing hierarchy. These levels are expressed in cash terms (or as a percent¬ 
age of average income and wealth levels in the country concerned) rather than 
by way of artificial statistical measures that can be difficult to interpret. Dis¬ 
tribution tables allow us to have a more concrete and visceral understanding 
of social inequality, as well as an appreciation of the data available to study 
these issues and the limits of those data. By contrast, statistical indices such as 
the Gini coefficient give an abstract and sterile view of inequality, which makes 
it difficult for people to grasp their position in the contemporary hierarchy 
(always a useful exercise, particularly when one belongs to the upper centiles 
of the distribution and tends to forget it, as is often the case with economists). 
Indices often obscure the fact that there are anomalies or inconsistencies in the 
underlying data, or that data from other countries or other periods are not di¬ 
rectly comparable (because, for example, the tops of the distribution have been 
truncated or because income from capital is omitted for some countries but not 
others). Working with distribution tables forces us to be more consistent and 
transparent. 


The Chaste Veil of Official Publications 

For similar reasons, caution is in order when using indices such as the interde¬ 
cile ratios often cited in official reports on inequality from the OECD or na¬ 
tional statistical agencies. The most frequently used interdecile ratio is the 
P90/P10, that is, the ratio between the ninetieth percentile of the income 
distribution and the tenth percentile . 23 For example, if one needs to earn more 
than 5,000 euros a month to belong to the top 10 percent of the income distri¬ 
bution and less than 1,000 euros a month to belong to the bottom 10 percent, 
then the P90/P10 ratio is 5. 

Such indices can be useful. It is always valuable to have more information 
about the complete shape of the distribution in question. One should bear in 
mind, however, that by construction these ratios totally ignore the evolution 
of the distribution beyond the ninetieth percentile. Concretely, no matter 
what the P90/P10 ratio may be, the top decile of the income or wealth distri¬ 
bution may have 20 percent of the total (as in the case of Scandinavian in¬ 
comes in the 1970s and 1980s) or 50 percent (as in the case of US incomes in 


267 


THE STRUCTURE OF INEQUALITY 


the 2010s) or 90 percent (as in the case of European wealth in the Belle 
Epoque). We will not learn any of this by consulting the publications of the 
international organizations or national statistical agencies who compile these 
statistics, however, because they usually focus on indices that deliberately ig¬ 
nore the top end of the distribution and give no indication of income or 
wealth beyond the ninetieth percentile. 

This practice is generally justified on the grounds that the available data 
are “imperfect.” This is true, but the difficulties can be overcome by using 
adequate sources, as the historical data collected (with limited means) in the 
World Top Incomes Database (WTID) show. This work has begun, slowly, 
to change the way things are done. Indeed, the methodological decision to 
ignore the top end is hardly neutral: the official reports of national and inter¬ 
national agencies are supposed to inform public debate about the distribu¬ 
tion of income and wealth, but in practice they often give an artificially rosy 
picture of inequality. It is as if an official government report on inequalities in 
France in 1789 deliberately ignored everything above the ninetieth percentile— 
a group 5 to 10 times larger than the entire aristocracy of the day—on the 
grounds that it was too complex to say anything about. Such a chaste ap¬ 
proach is all the more regrettable in that it inevitably feeds the wildest fanta¬ 
sies and tends to discredit official statistics and statisticians rather than calm 
social tensions. 

Conversely, interdecile ratios are sometimes quite high for largely artificial 
reasons. Take the distribution of capital ownership, for example: the bottom 
50 percent of the distribution generally own next to nothing. Depending on 
how small fortunes are measured—for example, whether or not durable goods 
and debts are counted—one can come up with apparently quite different 
evaluations of exactly where the tenth percentile of the wealth hierarchy lies: 
for the same underlying social reality, one might put it at 100 euros, 1,000 
euros, or even 10,000 euros, which in the end isn’t all that different but can 
lead to very different interdecile ratios, depending on the country and the 
period, even though the bottom half of the wealth distribution owns less than 
5 percent of total wealth. The same is only slightly less true of the labor in¬ 
come distribution: depending on how one chooses to treat replacement in¬ 
comes and pay for short periods of work (for example, depending on whether 
one uses the average weekly, monthly, annual, or decadal income) one can 
come up with highly variable Pio thresholds (and therefore interdecile ratios), 


268 


INEQUALITY AND CONCENTRATION: PRELIMINARY BEARINGS 


even though the bottom 50 percent of the labor income distribution actually 
draws a fairly stable share of the total income from labor. 24 

This is perhaps one of the main reasons why it is preferable to study distri¬ 
butions as I have presented them in Tables 7.1-3, that is, by emphasizing the 
shares of income and wealth claimed by different groups, particularly the bot¬ 
tom half and the top decile in each society, rather than the threshold levels 
defining given percentiles. The shares give a much more stable picture of real¬ 
ity than the interdecile ratios. 

Back to “Social Tables” and Political Arithmetic 

These, then, are my reasons for believing that the distribution tables I have 
been examining in this chapter are the best tool for studying the distribution 
of wealth, far better than synthetic indices and interdecile ratios. 

In addition, I believe that my approach is more consistent with national 
accounting methods. Now that national accounts for most countries enable 
us to measure national income and wealth every year (and therefore average 
income and wealth, since demographic sources provide easy access to popula¬ 
tion figures), the next step is naturally to break down these total income and 
wealth figures by decile and centile. Many reports have recommended that 
national accounts be improved and “humanized” in this way, but little prog¬ 
ress has been made to date. 25 A useful step in this direction would be a break¬ 
down indicating the poorest 50 percent, the middle 40 percent, and the rich¬ 
est 10 percent. In particular, such an approach would allow any observer to 
see just how much the growth of domestic output and national income is or is 
not reflected in the income actually received by these different social groups. 
For instance, only by knowing the share going to the top decile can we deter¬ 
mine the extent to which a disproportionate share of growth has been cap¬ 
tured by the top end of the distribution. Neither a Gini coefficient nor an in¬ 
terdecile ratio permits such a clear and precise response to this question. 

I will add, finally, that the distribution tables whose use I am recommend¬ 
ing are in some ways fairly similar to the “social tables” that were in vogue in 
the eighteenth and early nineteenth centuries. First developed in Britain and 
France in the late seventeenth century, these social tables were widely used, im¬ 
proved, and commented on in France during the Enlightenment: for example, 
in the celebrated article on “political arithmetic” in Diderot’s Encydopedia. From 


269 


THE STRUCTURE OF INEQUALITY 


the earliest versions established by Gregory King in 1688 to the more elabo¬ 
rate examples compiled by Expilly and Isnard on the eve of the French Revo¬ 
lution or by Peuchet, Colqhoun, and Blodget during the Napoleonic era, so¬ 
cial tables always aimed to provide a comprehensive vision of the social 
structure: they indicated the number of nobles, bourgeois, gentlemen, arti¬ 
sans, farmers, and so on along with their estimated income (and sometimes 
wealth); the same authors also compiled the earliest estimates of national in¬ 
come and wealth. There is, however, one essential difference between these 
tables and mine: the old social tables used the social categories of their time 
and did not seek to ascertain the distribution of wealth or income by deciles 
and centiles. 26 

Nevertheless, social tables sought to portray the flesh-and-blood aspects of 
inequality by emphasizing the shares of national wealth held by different so¬ 
cial groups (and, in particular, the various strata of the elite), and in this re¬ 
spect there are clear affinities with the approach I have taken here. At the 
same time, social tables are remote in spirit from the sterile, atemporal statis¬ 
tical measures of inequality such as those employed by Gini and Pareto, which 
were all too commonly used in the twentieth century and tend to naturalize 
the distribution of wealth. The way one tries to measure inequality is never 
neutral. 


270 


{ EIGHT } 


Two Worlds 


I have now precisely defined the notions needed for what follows, and I have 
introduced the orders of magnitude attained in practice by inequality with 
respect to labor and capital in various societies. The time has now come to look 
at the historical evolution of inequality around the world. How and why has 
the structure of inequality changed since the nineteenth century? The shocks 
of the period 1914-1945 played an essential role in the compression of inequal¬ 
ity, and this compression was in no way a harmonious or spontaneous occur¬ 
rence. The increase in inequality since 1970 has not been the same everywhere, 
which again suggests that institutional and political factors played a key role. 

A Simple Case: The Reduction of Inequality in France 
in the Tiventieth Century 

I will begin by examining at some length the case of France, which is particu¬ 
larly well documented (thanks to a rich lode of readily available historical 
sources). It is also relatively simple and straightforward (as far as it is possible 
for a history of inequality to be straightforward) and, above all, broadly repre¬ 
sentative of changes observed in several other European countries. By “Euro¬ 
pean” I mean “continental European,” because in some respects the British 
case is intermediate between the European and the US cases. To a large extent 
the continental European pattern is also representative of what happened in 
Japan. After France I will turn to the United States, and finally I will extend 
the analysis to the entire set of developed and emerging economies for which 
adequate historical data exist. 

Figure 8.1 depicts the upper decile’s share of both national income and 
wages over time. Three facts stand out. 

First, income inequality has greatly diminished in France since the Belle 
Epoque: the upper decile’s share of national income decreased from 45-50 
percent on the eve of World War I to 30-35 percent today. 


271 


incomes or 


THE STRUCTURE OF INEQUALITY 



FIGURE 8.1. Income inequality in France, 1910-2010 

Inequality of total income (labor and capital) has dropped in France during the twen¬ 
tieth century, while wage inequality has remained the same. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


This drop of 15 percentage points of national income is considerable. It 
represents a decrease of about one-third in the share of each year’s output go¬ 
ing to the wealthiest 10 percent of the population and an increase of about a 
third in the share going to the other 90 percent. Note, too, that this is roughly 
equivalent to three-quarters of what the bottom half of the population re¬ 
ceived in the Belle Epoque and more than half of what it receives today. 1 Re¬ 
call, moreover, that in this part of the book, I am examining inequality of 
primary incomes (that is, before taxes and transfers). In Part Four, I will show 
how taxes and transfers reduced inequality even more. To be clear, the fact 
that inequality decreased does not mean that we are living today in an egali¬ 
tarian society. It mainly reflects the fact that the society of the Belle Epoque 
was extremely inegalitarian—indeed, one of the most inegalitarian societies 
of all time. The form that this inequality took and the way it came about would 
not, I think, be readily accepted today. 

Second, the significant compression of income inequality over the course 
of the twentieth century was due entirely to diminished top incomes from 
capital. If we ignore income from capital and concentrate on wage inequality. 


272 


































TWO WORLDS 



figure 8.2. The fall of rentiers in France, 1910-2010 

The fall in the top percentile share (the top 1 percent highest incomes) in France 
between 1914 and 1945 is due to the fall of top capital incomes. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


we find that the distribution remained quite stable over the long run. In the 
first decade of the twentieth century as in the second decade of the twenty- 
first, the upper decile of the wage hierarchy received about 25 percent of total 
wages. The sources also indicate long-term stability of wage inequality at the 
bottom end of the distribution. For example, the least well paid 50 percent 
always received 25-30 percent of total wages (so that the average pay of a mem¬ 
ber of this group was 50-60 percent of the average wage overall), with no clear 
long-term trend . 2 The wage level has obviously changed a great deal over the 
past century, and the composition and skills of the workforce have been to¬ 
tally transformed, but the wage hierarchy has remained more or less the same. 
If top incomes from capital had not decreased, income inequality would not 
have diminished in the twentieth century. 

This fact stands out even more boldly when we climb the rungs of the social 
ladder. Look, in particular, at the evolution of the top centile (Figure 8.2)? 
Compared with the peak inequality of the Belle Fpoque, the top centile’s 
share of income literally collapsed in France over the course of the twentieth 
century, dropping from more than 20 percent of national income in 1900-1910 


273 
















































THE STRUCTURE OF INEQUALITY 


to 8 or 9 percent in 2000-2010. This represents a decrease of more than half 
in one century, indeed nearly two-thirds if we look at the bottom of the curve 
in the early 1980s, when the top centile’s share of national income was barely 7 
percent. 

Again, this collapse was due solely to the decrease of very high incomes 
from capital (or, crudely put, the fall of the rentier). If we look only at wages, 
we find that the upper centile’s share remains almost totally stable over the 
long run at around 6 or 7 percent of total wages. On the eve of World War I, 
income inequality (as measured by the share of the upper centile) was nearly 
three times greater than wage inequality. Today it is a nearly a third higher 
and largely identical with wage inequality, to the point where one might 
imagine—incorrectly—that top incomes from capital have virtually disappeared 
(see Figure 8.2). 

To sum up: the reduction of inequality in France during the twentieth 
century is largely explained by the fall of the rentier and the collapse of very 
high incomes from capital. No generalized structural process of inequality 
compression (and particularly wage inequality compression) seems to have 
operated over the long run, contrary to the optimistic predictions of Kuznets’s 
theory. 

Herein lies a fundamental lesson about the historical dynamics of the 
distribution of wealth, no doubt the most important lesson the twentieth 
century has to teach. This is all the more true when we recognize that the 
factual picture is more or less the same in all developed countries, with minor 
variations. 

The History of Inequality: A Chaotic Political History 

The third important fact to emerge from Figures 8.1 and 8.2 is that the history 
of inequality has not been a long, tranquil river. There have been many twists 
and turns and certainly no irrepressible, regular tendency toward a “natural” 
equilibrium. In France and elsewhere, the history of inequality has always 
been chaotic and political, influenced by convulsive social changes and driven 
not only by economic factors but by countless social, political, military, and 
cultural phenomena as well. Socioeconomic inequalities—disparities of in¬ 
come and wealth between social groups—are always both causes and effects 
of other developments in other spheres. All these dimensions of analysis are 


274 


TWO WORLDS 


inextricably intertwined. Hence the history of the distribution of wealth is 
one way of interpreting a country’s history more generally. 

In the case of France, it is striking to see the extent to which the compres¬ 
sion of income inequality is concentrated in one highly distinctive period: 
1914-1945. The shares of both the upper decile and upper centile in total in¬ 
come reached their nadir in the aftermath of World War II and seem never to 
have recovered from the extremely violent shocks of the war years (see Figures 8.1 
and 8.2). To a large extent, it was the chaos of war, with its attendant eco¬ 
nomic and political shocks, that reduced inequality in the twentieth century. 
There was no gradual, consensual, conflict-free evolution toward greater equal¬ 
ity. In the twentieth century it was war, and not harmonious democratic or 
economic rationality, that erased the past and enabled society to begin anew 
with a clean slate. 

What were these shocks? I discussed them in Part Two: destruction caused 
by two world wars, bankruptcies caused by the Great Depression, and above 
all new public policies enacted in this period (from rent control to national¬ 
izations and the inflation-induced euthanasia of the rentier class that lived on 
government debt). All of these things led to a sharp drop in the capital/income 
ratio between 1914 and 1945 and a significant decrease in the share of income 
from capital in national income. But capital is far more concentrated than 
labor, so income from capital is substantially overrepresented in the upper 
decile of the income hierarchy (even more so in the upper centile). Hence 
there is nothing surprising about the fact that the shocks endured by capital, 
especially private capital, in the period 1914-1945 diminished the share of the 
upper decile (and upper centile), ultimately leading to a significant compres¬ 
sion of income inequality. 

France first imposed a tax on income in 1914 (the Senate had blocked this 
reform since the 1890s, and it was not finally adopted until July 15,1914, a few 
weeks before war was declared, in an extremely tense climate). For that rea¬ 
son, we unfortunately have no detailed annual data on the structure of in¬ 
come before that date. In the first decade of the twentieth century, numerous 
estimates were made of the distribution of income in anticipation of the im¬ 
position of a general income tax, in order to predict how much revenue such a 
tax might bring in. We therefore have a rough idea of how concentrated in¬ 
come was in the Belle Epoque. But these estimates are not sufficient to give us 
historical perspective on the shock of World War I (for that, the income tax 


275 


Share in total income of various fractiles 


THE STRUCTURE OF INEQUALITY 



FIGURE 8.3. The composition of top incomes in France in 1932 

Labor income becomes less and less important as one goes up within the top decile of 
total income. Notes: (i) “P90-95” includes individuals between percentiles 90 to 95, 
“P95-99” includes the next 4 percent, “P99-99.5” the next 0.5 percent, etc.; (ii) Labor 
income: wages, bonuses, pensions. Capital income: dividends, interest, rent. Mixed 
income: self-employment income. 

Sources and series: see piketty.pse.ens.fr/capital21c. 

would have to have been adopted several decades earlier). 4 Fortunately, data 
on estate taxes, which have been levied since 1791, allow us to study the evolu¬ 
tion of the wealth distribution throughout the nineteenth and twentieth 
centuries, and we are therefore able to confirm the central role played by the 
shocks of 1914-1945. For these data indicate that on the eve of World War I, 
nothing presaged a spontaneous reduction of the concentration of capital 
ownership—on the contrary. From the same source we also know that in¬ 
come from capital accounted for the lion’s share of the upper centile’s income 
in the period 1900-1910. 


From a “Society of Rentiers” to a “Society of Managers” 

In 1932, despite the economic crisis, income from capital still represented the 
main source of income for the top 0.5 percent of the distribution (see 
Figure 8.3). 5 But when we look at the composition of the top income group 


276 






















Share in total income of various fractiles 


TWO WORLDS 



figure 8.4. The composition of top incomes in France in 2005 

Capital income becomes dominant at the level of the top 0.1 percent in France in 2005, 
as opposed to the top 0.5 percent in 1932. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


today, we find that a profound change has occurred. To be sure, today as in 
the past, income from labor gradually disappears as one moves higher in the 
income hierarchy, and income from capital becomes more and more predomi¬ 
nant in the top centiles and thousandths of the distribution: this structural 
feature has not changed. There is one crucial difference, however: today one 
has to climb much higher in the social hierarchy before income from capital 
outweighs income from labor. Currently, income from capital exceeds income 
from labor only in the top 0.1 percent of the income distribution (see Figure 
8.4). In 1932, this social group was 5 times larger; in the Belle Epoque it was 10 
times larger. 

Make no mistake: this is a significant change. The top centile occupies a 
very prominent place in any society. It structures the economic and political 
landscape. This is much less true of the top thousandth . 6 Although this is a 
matter of degree, it is nevertheless important: there are moments when the 
quantitative becomes qualitative. This change also explains why the share of 
income going to the upper centile today is barely higher than the upper centile’s 


277 


















THE STRUCTURE OF INEQUALITY 


share of total wages: income from capital assumes decisive importance only in 
the top thousandth or top ten-thousandth. Its influence in the top centile as a 
whole is relatively insignificant. 

To a large extent, we have gone from a society of rentiers to a society of 
managers, that is, from a society in which the top centile is dominated by 
rentiers (people who own enough capital to live on the annual income from 
their wealth) to a society in which the top of the income hierarchy, including 
to upper centile, consists mainly of highly paid individuals who live on income 
from labor. One might also say, more correctly (if less positively), that we have 
gone front a society of superrentiers to a less extreme form of rentier society, 
with a better balance between success through work and success through 
capital. It is important, however, to be clear that this major upheaval came 
about, in France at any rate, without any expansion of the wage hierarchy 
(which has been globally stable for a long time: the universe of individuals 
who are paid for their labor has never been as homogeneous as many people 
think); it was due entirely to the decrease in high incomes from capital. 

To sum up: what happened in France is that rentiers (or at any rate nine- 
tenths of them) fell behind managers; managers did not race ahead of rentiers. 
We need to understand the reasons for this long-term change, which are not 
obvious at first glance, since I showed in Part Two that the capital/income 
ratio has lately returned to Belle Epoque levels. The collapse of the rentier be¬ 
tween 1914 and 1945 is the obvious part of the story. Exactly why rentiers have 
not come back is the more complex and in some ways more important and 
interesting part. Among the structural factors that may have limited the con¬ 
centration of wealth since World War II and to this day have helped prevent 
the resurrection of a society of rentiers as extreme as that which existed on the 
eve of World War I, we can obviously cite the creation of highly progressive 
taxes on income and inheritances (which for the most part did not exist prior 
to 1920). But other factors may also have played a significant and potentially 
equally important role. 

The Different Worlds of the Top Decile 

But first, let me dwell a moment on the very diverse social groups that make 
up the top decile of the income hierarchy. The boundaries between the vari¬ 
ous subgroups have changed over time: income from capital used to predomi- 


278 


TWO WORLDS 


nate in the top centile but today predominates only in the top thousandth. 
More than that, the coexistence of several worlds within the top decile can help 
us to understand the often chaotic short- and medium-term evolutions we see 
in the data. Income statements required by the new tax laws have proved to be 
a rich historical source, despite their many imperfections. With their help, it 
is possible to precisely describe and analyze the diversity at the top of the in¬ 
come distribution and its evolution over time. It is particularly striking to 
note that in all the countries for which we have this type of data, in all peri¬ 
ods, the composition of the top income group can be characterized by inter¬ 
secting curves like those shown in Figures 8.3 and 8.4 for France in 1932 and 
2005, respectively: the share of income from labor always decreases rapidly as 
one moves progressively higher in the top decile, and the share of income 
from capital always rises sharply. 

In the poorer half of the top decile, we are truly in the world of managers: 
80-90 percent of income comes from compensation for labor. 7 Moving up to 
the next 4 percent, the share of income from labor decreases slightly but re¬ 
mains clearly dominant at 70-80 percent of total income in the interwar pe¬ 
riod as well as today (see Figures 8.3 and 8.4). In this large “9 percent” group 
(that is, the upper decile exclusive of the top centile), we find mainly individuals 
living primarily on income from labor, including both private sector manag¬ 
ers and engineers and senior officials and teachers from the public sector. Here, 
pay is usually 2 to 3 times the average wage for society as a whole: if average 
wages are 2,000 euros a month, in other words, this group earns 4,000-6,000 
a month. 

Obviously, the types of jobs and levels of skill required at this level have 
changed considerably over time: in the interwar years, high school teachers 
and even late-career grade school teachers belonged to “the 9 percent,” whereas 
today one has to be a college professor or researcher or, better yet, a senior 
government official to make the grade. 8 In the past, a foreman or skilled tech¬ 
nician came close to making it into this group. Today one has to be at least a 
middle manager and increasingly a top manager with a degree from a pres¬ 
tigious university or business school. The same is true lower down the pay 
scale: once upon a time, the least well paid workers (typically paid about half 
the average wage, or 1,000 euros a month if the average is 2,000) were farm 
laborers and domestic servants. At a later point, these were replaced by less 
skilled industrial workers, many of whom were women in the textile and food 


279 


THE STRUCTURE OF INEQUALITY 


processing industries. This group still exists today, but the lowest paid work¬ 
ers are now in the service sector, employed as waiters and waitresses in restau¬ 
rants or as shop clerks (again, many of these are women). Thus the labor mar¬ 
ket was totally transformed over the past century, but the structure of wage 
inequality across the market barely changed over the long run, with “the 
9 percent” just below the top and the 50 percent at the bottom still drawing 
about the same shares of income from labor over a very considerable period of 
time. 

Within “the 9 percent” we also find doctors, lawyers, merchants, restaura¬ 
teurs, and other self-employed entrepreneurs. Their number grows as we move 
closer to “the 1 percent,” as is shown by the curve indicating the share of “mixed 
incomes” (that is, incomes of nonwage workers, which includes both compen¬ 
sation for labor and income from business capital, which I have shown sepa¬ 
rately in Figures 8.3 and 8.4). Mixed incomes account for 20-30 percent of 
total income in the neighborhood of the top centile threshold, but this per¬ 
centage decreases as we move higher into the top centile, where pure capital 
income (rent, interest, and dividends) clearly predominates. To make it into 
“the 9 percent” or even rise into the lower strata of “the 1 percent,” which means 
attaining an income 4-5 times higher than the average (that is, 8,000-10,000 
euros a month in a society where the average income is 2,000), choosing to 
become a doctor, lawyer, or successful restaurateur may therefore be a good 
strategy, and it is almost as common (actually about half as common) as the 
choice to become a top manager in a large firm. 9 But to reach the stratosphere 
of “the 1 percent” and enjoy an income several tens of times greater than aver¬ 
age (hundreds of thousands if not millions of euros per year), such a strategy 
is unlikely to be enough. A person who owns substantial amounts of assets is 
more likely to reach the top of the income hierarchy. 10 

It is interesting that it was only in the immediate postwar years (1919- 
1920 in France and then again 1945-1946) that this hierarchy was reversed: 
mixed incomes very briefly surpassed income from capital in the upper levels 
of the top centile. This apparently reflects rapid accumulation of new fortunes 
in connection with postwar reconstruction. 11 

To sum up: the top decile always encompasses two very different worlds: 
“the 9 percent,” in which income from labor clearly predominates, and “the 1 
percent,” in which income from capital becomes progressively more impor¬ 
tant (more or less rapidly and massively, depending on the period). The transi- 


280 


TWO WORLDS 


tion between the two groups is always gradual, and the frontiers are of course 
porous, but the differences are nevertheless clear and systematic. 

For example, while income from capital is obviously not altogether absent 
from the income of “the 9 percent,” it is usually not the main source of income 
but simply a supplement. A manager earning 4,000 euros a month may also 
own an apartment that she rents for 1,000 euros a month (or lives in, thus 
avoiding paying a rent of 1,000 euros a month, which comes to the same thing 
financially). Her total income is then 5,000 euros a month, 80 percent of which 
is income from labor and 20 percent from capital. Indeed, an 80-20 split be¬ 
tween labor and capital is reasonably representative of the structure of income 
among “the 9 percent”; this was true between the two world wars and remains 
true today. A part of this group’s income from capital may also come from sav¬ 
ings accounts, life insurance contracts, and financial investments, but real es¬ 
tate generally predominates. 12 

Conversely, within “the 1 percent,” it is labor income that gradually be¬ 
comes supplementary, while capital increasingly becomes the main source of 
income. Another interesting pattern is the following: if we break income from 
capital down into rent on land and structures on the one hand and dividends 
and interest from mobile capital on the other, we find that the very large share 
of income from capital in the upper decile is due largely to the latter (espe¬ 
cially dividends). For example, in France, the share of income from capital in 
1932 as well as 2005 is 20 percent at the level of “the 9 percent” but increases to 
60 percent in the top 0.01 percent. In both cases, this sharp increase is ex¬ 
plained entirely by income from financial assets (almost all of it in the form of 
dividends). The share of rent stagnates at around 10 percent of total income 
and even tends to diminish in the top centile. This pattern reflects the fact 
that large fortunes consist primarily of financial assets (mainly stocks and 
shares in partnerships). 

The Limits of Income Tax Returns 

Despite all these interesting patterns, I must stress the limits of the fiscal 
sources used in this chapter. Figures 8.3 and 8.4 are based solely on income 
from capital reported in tax returns. Actual capital income is therefore under¬ 
estimated, owing both to tax evasion (it is easier to hide investment income 
than wages, for example, by using foreign bank accounts in countries that do 


281 


THE STRUCTURE OF INEQUALITY 


not cooperate with the country in which the taxpayer resides) and to the exis¬ 
tence of various tax exemptions that allow whole categories of capital income 
to legally avoid the income tax (which in France and elsewhere was originally 
intended to include all types of income). Since income from capital is over¬ 
represented in the top decile, this underdeclaration of capital income also 
implies that the shares of the upper decile and centile indicated on Figures 8.1 
and 8.1, which are based solely on income tax returns, are underestimated (for 
France and other countries). These shares are in any case approximate. They 
are interesting (like all economic and social statistics) mainly as indicators of 
orders of magnitude and should be taken as low estimates of the actual level 
of inequality. 

In the French case, we can compare self-declared income on tax returns 
with other sources (such as national accounts and sources that give a more di¬ 
rect measure of the distribution of wealth) to estimate how much we need to 
adjust our results to compensate for the underdeclaration of capital income. It 
turns out that we need to add several percentage points to capital income’s 
share of national income (perhaps as many as 5 percentage points if we choose 
a high estimate of tax evasion, but more realistically 2 to 3 percentage points). 
This is not a negligible amount. Put differently, the share of the top decile in 
national income, which according to Figure 8.1 fell from 45-50 percent in 
1900-1910 to 30-35 percent in 2000-2010, was no doubt closer to 50 percent 
(or even slightly higher) in the Belle Fpoque and is currently slightly more 
than 35 percent . 13 Nevertheless, this correction does not significantly affect 
the overall evolution of income inequality. Even if opportunities for legal tax 
avoidance and illegal tax evasion have increased in recent years (thanks in par¬ 
ticular to the emergence of tax havens about which I will say more later on), 
we must remember that income from mobile capital was already significantly 
underreported in the early twentieth century and during the interwar years. 
All signs are that the copies of dividend and interest coupons requested by the 
governments of that time were no more effective than today’s bilateral agree¬ 
ments as a means of ensuring compliance with applicable tax laws. 

To a first approximation, therefore, we may assume that accounting for 
tax avoidance and evasion would increase the levels of inequality derived from 
tax returns by similar proportions in different periods and would therefore 
not substantially modify the time trends and evolutions I have identified. 


282 


TWO WORLDS 


Note, however, that we have not yet attempted to apply such corrections 
in a systematic and consistent way in different countries. This is an important 
limitation of the World Top Incomes Database. One consequence is that our 
series underestimate—probably slightly—the increase of inequality that can 
be observed in most countries after 1970, and in particular the role of income 
from capital. In fact, income tax returns are becoming increasingly less accu¬ 
rate sources for studying capital income, and it is indispensable to make use of 
other, complementary sources as well. These may be either macroeconomic 
sources (of the kind used in Part Two to study the dynamics of the capital/ 
income ratio and capital-labor split) or microeconomic sources (with which it 
is possible to study the distribution of wealth directly, and of which I will 
make use in subsequent chapters). 

Furthermore, different capital taxation laws may bias international com¬ 
parisons. Broadly speaking, rents, interest, and dividends are treated fairly 
similarly in different countries . 14 By contrast, there are significant variations 
in the treatment of capital gains. For instance, capital gains are not fully or 
consistently reported in French tax data (and I have simply excluded them al¬ 
together), while they have always been fairly well accounted for in US tax 
data. This can make a major difference, because capital gains, especially those 
realized from the sale of stocks, constitute a form of capital income that is 
highly concentrated in the very top income groups (in some cases even more 
than dividends). For example, if Figures 8.3 and 8.4 included capital gains, the 
share of income from capital in the top ten-thousandth would not be 60 per¬ 
cent but something closer to 70 or 80 percent (depending on the year ). 15 So as 
not to bias comparisons, I will present the results for the United States both 
with and without capital gains. 

The other important limitation of income tax returns is that they contain 
no information about the origin of the capital whose income is being re¬ 
ported. We can see the income produced by capital owned by the taxpayer at 
a particular moment in time, but we have no idea whether that capital was 
inherited or accumulated by the taxpayer during his or her lifetime with in¬ 
come derived from labor (or from other capital). In other words, an identical 
level of inequality with respect to income from capital can in fact reflect very 
different situations, and we would never learn anything about these differ¬ 
ences if we restricted ourselves to tax return data. Generally speaking, very 


283 


THE STRUCTURE OF INEQUALITY 


high incomes from capital usually correspond to fortunes so large that it is 
hard to imagine that they could have been amassed with savings from labor 
income alone (even in the case of a very high-level manager or executive). There 
is every reason to believe that inheritance plays a major role. As we will see in 
later chapters, however, the relative importance of inheritance and saving has 
evolved considerably over time, and this is a subject that deserves further 
study. Once again, I will need to make use of sources bearing directly on the 
question of inheritance. 

The Chaos of the Interwar Years 

Consider the evolution of income inequality in France over the last century. 
Between 1914 and 1945, the share of the top centile of the income hierarchy 
fell almost constantly, dropping gradually from 2.0 percent in 1914 to just 7 
percent in 1945 (Figure 8.2). This steady decline reflects the long and virtually 
uninterrupted series of shocks sustained by capital (and income front capital) 
during this time. By contrast, the share of the top decile of the income hierar¬ 
chy decreased much less steadily. It apparently fell during World War I, but 
this was followed by an unsteady recovery in the 1920s and then a very sharp, 
and at first sight surprising, rise between 1929 and 1935, followed by a steep 
decline in 1936-1938 and a collapse during World War II. 16 In the end, the top 
decile’s share of national income, which was more than 45 percent in 1914, fell 
to less than 30 percent in 1944-1943. 

If we consider the entire period 1914-1945, the two declines are perfectly 
consistent: the share of the upper decile decreased by nearly 18 points, accord¬ 
ing to my estimates, and the upper centile by nearly 14 points. 17 In other words, 
“the 1 percent” by itself accounts for roughly three-quarters of the decrease in 
inequality between 1914 and 1943, while “the 9 percent” explains roughly one- 
quarter. This is hardly surprising in view of the extreme concentration of capi¬ 
tal in the hands of “the 1 percent,” who in addition often held riskier assets. 

By contrast, the differences observed during this period are at first sight 
more surprising: Why did the share of the upper decile rise sharply after the 
crash of 1929 and continue at least until 1935, while the share of the top centile 
fell, especially between 1929 and 1932? 

In fact, when we look at the data more closely, year by year, each of these 
variations has a perfectly good explanation. It is enlightening to revisit the 


284 


TWO WORLDS 


chaotic interwar period, when social tensions ran very high. To understand 
what happened, we must recognize that “the 9 percent” and “the 1 percent” 
lived on very different income streams. Most of the income of “the 1 percent” 
came in the form of income from capital, especially interest and dividends 
paid by the firms whose stocks and bonds made up the assets of this group. 
That is why the top centile’s share plummeted during the Depression, as the 
economy collapsed, profits fell, and firm after firm went bankrupt. 

By contrast, “the 9 percent” included many managers, who were the great 
beneficiaries of the Depression, at least when compared with other social 
groups. They suffered much less from unemployment than the employees who 
worked under them. In particular, they never experienced the extremely high 
rates of partial or total unemployment endured by industrial workers. They 
were also much less affected by the decline in company profits than those who 
stood above them in the income hierarchy. Within “the 9 percent,” midlevel 
civil servants and teachers fared particularly well. They had only recently been 
the beneficiaries of civil service raises granted in the period 1927-1931. (Recall 
that government workers, particularly those at the top of the pay scale, had 
suffered greatly during World War I and had been hit hard by the inflation of 
the early 1920s.) These midlevel employees were immune, too, from the risk of 
unemployment, so that the public sector’s wage bill remained constant in nomi¬ 
nal terms until 1933 (and decreased only slightly in 1934-1935, when Prime 
Minister Pierre Laval sought to cut civil service pay). Meanwhile, private sec¬ 
tor wages decreased by more than 50 percent between 1929 and 1935. The se¬ 
vere deflation France suffered in this period (prices fell by 25 percent between 
1929 and 1935, as both trade and production collapsed) played a key role in the 
process: individuals lucky enough to hold on to their jobs and their nominal 
compensation—typically civil servants—enjoyed increased purchasing power 
in the midst of the Depression as falling prices raised their real wages. Fur¬ 
thermore, such capital income as “the 9 percent” enjoyed—typically in the 
form of rents, which were extremely rigid in nominal terms—also increased 
on account of the deflation, so that the real value of this income stream rose 
significantly, while the dividends paid to “the 1 percent” evaporated. 

For all these reasons, the share of national income going to “the 9 percent” 
increased quite significantly in France between 1929 and 1935, much more 
than the share of “the 1 percent” decreased, so that the share of the upper decile 
as a whole increased by more than 5 percent of national income (see Figures 


285 


THE STRUCTURE OF INEQUALITY 


8.1 and 8.2). The process was completely turned around, however, when the 
Popular Front came to power: workers’ wages increased sharply as a result of 
the Matignon Accords, and the franc was devalued in September 1936, result¬ 
ing in inflation and a decrease of the shares of both “the 9 percent” and the 
top decile in 1936-1938. 18 

The foregoing discussion demonstrates the usefulness of breaking income 
down by centiles and income source. If we had tried to analyze the interwar 
dynamic by using a synthetic index such as the Gini coefficient, it would have 
been impossible to understand what was going on. We would not have been 
able to distinguish between income from labor and income from capital or 
between short-term and long-term changes. In the French case, what makes 
the period 1914-1945 so complex is the fact that although the general trend is 
fairly clear (a sharp drop in the share of national income going to the top de¬ 
cile, induced by a collapse of the top centile’s share), many smaller counter¬ 
movements were superimposed on this overall pattern in the 1920s and 1930s. 
We find similar complexity in other countries in the interwar period, with 
characteristic features associated with the history of each particular country. 
For example, deflation ended in the United States in 1933, when President 
Roosevelt came to power, so that the reversal that occurred in France in 1936 
came earlier in America, in 1933. In every country the history of inequality is 
political—and chaotic. 


The Clash of Temporalities 

Broadly speaking, it is important when studying the dynamics of the income 
and wealth distributions to distinguish among several different time scales. In 
this book I am primarily interested in long-term evolutions, fundamental 
trends that in many cases cannot be appreciated on time scales of less than 
thirty to forty years or even longer, as shown, for example, by the structural 
increase in the capital/income ratio in Europe since World War II, a process that 
has been going on for nearly seventy years now yet would have been difficult 
to detect just ten or twenty years ago owing to the superimposition of various 
other developments (as well as the absence of usable data). But this focus on the 
long period must not be allowed to obscure the fact that shorter-term trends also 
exist. To be sure, these are often counterbalanced in the end, but for the people 
who live through them they often appear, quite legitimately, to be the most 


286 


TWO WORLDS 


significant realities of the age. Indeed, how could it be otherwise, when these 
“short-term” movements can continue for ten to fifteen years or even longer, 
which is quite long when measured on the scale of a human lifetime. 

The history of inequality in France and elsewhere is replete with these 
short- and medium-term movements—and not just in the particularly chaotic 
interwar years. Let me briefly recount the major episodes in the case of France. 
During both world wars, the wage hierarchy was compressed, but in the after¬ 
math of each war, wage inequalities reasserted themselves (in the 1920s and 
then again in the late 1940s and on into the 1950s and 1960s). These were 
movements of considerable magnitude: the share of total wages going to the 
top 10 percent decreased by about 5 points during each conflict but recovered 
afterward by the same amount (see Figure 8.1). 19 Wage spreads were reduced 
in the public as well as the private sector. In each war the scenario was the 
same: in wartime, economic activity decreases, inflation increases, and real wages 
and purchasing power begin to fall. Wages at the bottom of the wage scale 
generally rise, however, and are somewhat more generously protected from 
inflation than those at the top. This can induce significant changes in the 
wage distribution if inflation is high. Why are low and medium wages better 
indexed to inflation than higher wages? Because workers share certain per¬ 
ceptions of social justice and norms of fairness, an effort is made to prevent 
the purchasing power of the least well-off from dropping too sharply, while 
their better-off comrades are asked to postpone their demands until the war is 
over. This phenomenon clearly played a role in setting wage scales in the pub¬ 
lic sector, and it was probably the same, at least to a certain extent, in the pri¬ 
vate sector. The fact that large numbers of young and relatively unskilled 
workers were mobilized for service (or held in prisoner-of-war camps) may 
also have improved the relative position of low- and medium-wage workers on 
the labor market. 

In any case, the compression of wage inequality was reversed in both post¬ 
war periods, and it is therefore tempting to forget that it ever occurred. Nev¬ 
ertheless, for workers who lived through these periods, the changes in the 
wage distribution made a deep impression. In particular, the issue of restoring 
the wage hierarchy in both the public and private sectors was one of the most 
important political, social, and economic issues of the postwar years. 

Turning now to the history of inequality in France between 1945 and 2010, 
we find three distinct phases: income inequality rose sharply between 1945 


287 


THE STRUCTURE OF INEQUALITY 


and 1967 (with the share going to the top decile increasing from less than 30 
to 36 or 37 percent). It then decreased considerably between 1968 and 1983 
(with the share of the top decile dropping back to 30 percent). Finally, ine¬ 
quality increased steadily after 1983, so that the top decile’s share climbed to 
about 33 percent in the period 2000-2010 (see Figure 8.1). We find roughly 
similar changes of wage inequality at the level of the top centile (see Figures 
8.3 and 8.3). Once again, these various increases and decreases more or less bal¬ 
ance out, so it is tempting to ignore them and concentrate on the relative sta¬ 
bility over the long run, 1945-2010. Indeed, if one were interested solely in 
very long-term evolutions, the outstanding change in France during the twen¬ 
tieth century would be the significant compression of wage inequality be¬ 
tween 1914 and 1945, followed by relative stability afterward. Each way of 
looking at the matter is legitimate and important in its own right, and to my 
mind it is essential to keep all of these different time scales in mind: the long 
term is important, but so are the short and the medium term. I touched on 
this point previously in my examination of the evolution of the capital/income 
ratio and the capital-labor split in Part Two (see in particular Chapter 6). 

It is interesting to note that the capital-labor split tends to move in the 
same direction as inequality in income from labor, so that the two reinforce 
each other in the short to medium term but not necessarily in the long run. 
For example, each of the two world wars saw a decrease in capital’s share of 
national income (and of the capital/income ratio) as well as a compression of 
wage inequality. Generally speaking, inequality tends to evolve “procyclically” 
(that is, it moves in the same direction as the economic cycle, in contrast to 
“countercyclical” changes). In economic booms, the share of profits in na¬ 
tional income tends to increase, and pay at the top end of the scale (including 
incentives and bonuses) often increases more than wages toward the bottom 
and middle. Conversely, during economic slowdowns or recessions (of which 
war can be seen as an extreme form), various noneconomic factors, especially 
political ones, ensure that these movements do not depend solely on the eco¬ 
nomic cycle. 

The substantial increase in French inequality between 1945 and 1967 was 
the result of sharp increases in both capital’s share of national income and 
wage inequality in a context of rapid economic growth. The political climate 
undoubtedly played a role: the country was entirely focused on reconstruc¬ 
tion, and decreasing inequality was not a priority, especially since it was com- 


288 


TWO WORLDS 


mon knowledge that inequality had decreased enormously during the war. In 
the 1950s and 1960s, managers, engineers, and other skilled personnel saw their 
pay increase more rapidly than the pay of workers at the bottom and middle 
of the wage hierarchy, and at first no one seemed to care. A national minimum 
wage was created in 1950 but was seldom increased thereafter and fell farther 
and farther behind the average wage. 

Things changed suddenly in 1968. The events of May 1968 had roots in 
student grievances and cultural and social issues that had little to do with the 
question of wages (although many people had tired of the inegalitarian pro- 
ductivist growth model of the 1950s and 1960s, and this no doubt played a 
role in the crisis). But the most immediate political result of the movement 
was its effect on wages: to end the crisis, Charles de Gaulle’s government signed 
the Grenelle Accords, which provided, among other things, for a 20 percent 
increase in the minimum wage. In 1970, the minimum wage was officially (if 
partially) indexed to the mean wage, and governments from 1968 to 1983 felt 
obliged to “boost” the minimum significantly almost every year in a seething 
social and political climate. The purchasing power of the minimum wage ac¬ 
cordingly increased by more than 130 percent between 1968 and 1983, while 
the mean wage increased by only about 50 percent, resulting in a very signifi¬ 
cant compression of wage inequalities. The break with the previous period 
was sharp and substantial: the purchasing power of the minimum wage had 
increased barely 25 percent between 1950 and 1968, while the average wage 
had more than doubled . 20 Driven by the sharp rise of low wages, the total 
wage bill rose markedly more rapidly than output between 1968 and 1983, and 
this explains the sharp decrease in capital’s share of national income that I 
pointed out in Part Two, as well as the very substantial compression of in¬ 
come inequality. 

These movements reversed in 1982-1983. The new Socialist government 
elected in May 1981 surely would have preferred to continue the earlier trend, 
but it was not a simple matter to arrange for the minimum wage to increase 
twice as fast as the average wage (especially when the average wage itself was 
increasing faster than output). In 1982-1983, therefore, the government de¬ 
cided to “turn toward austerity”: wages were frozen, and the policy of annual 
boosts to the minimum wage was definitively abandoned. The results were 
soon apparent: the share of profits in national income skyrocketed during 
the remainder of the 1980s, while wage inequalities once again increased, and 


289 


THE STRUCTURE OF INEQUALITY 


income inequalities even more so (see Figures 8.1 and 8.2). The break was as 
sharp as that of 1968, but in the other direction. 

The Increase of Inequality in France since the 1980s 

How should we characterize the phase of increasing inequality that began in 
France in 1982-1983? It is tempting to see it in a long-run perspective as a mi¬ 
crophenomenon, a simple reversal of the previous trend, especially since by 
1990 or so the share of profits in national income had returned to the level 
achieved on the eve of May 1968. 21 This would be a mistake, however, for sev¬ 
eral reasons. First, as I showed in Part Two, the profit share in 1966-1967 was 
historically high, a consequence of the restoration of capital’s share that began 
at the end of World War II. If we include, as we should, rent as well as profit 
in income from capital, we find that capital’s share of national income actu¬ 
ally continued to grow in the 1990s and 2000s. A correct understanding of 
this long-run phenomenon requires that it be placed in the context of the 
long-term evolution of the capital/income ratio, which by 2010 had returned 
to virtually the same level it had achieved in France on the eve of World War I. 
It is impossible to fully appreciate the implications of this restoration of the 
prosperity of capital simply by looking at the evolution of the upper decile’s 
share of income, in part because income from capital is understated, so that 
we tend to slightly underestimate the increase in top incomes, and in part 
because the real issue is the renewed importance of inherited wealth, a long¬ 
term process that has only begun to reveal its true effects and can be correctly 
analyzed only by directly studying the changing role and importance of in¬ 
herited wealth as such. 

But that is not all. A stunning new phenomenon emerged in France in the 
1990s: the very top salaries, and especially the pay packages awarded to the 
top executives of the largest companies and financial firms, reached astonish¬ 
ing heights—somewhat less astonishing in France, for the time being, than in 
the United States, but still, it would be wrong to neglect this new develop¬ 
ment. The share of wages going to the top centile, which was less than 6 per¬ 
cent in the 1980s and 1990s, began to increase in the late 1990s and reached 
7.5-8 percent of the total by the early 2010s. Thus there was an increase of 
nearly 30 percent in a little over a decade, which is far from negligible. If we 
move even higher up the salary and bonus scale to look at the top 0.1 or 0.01 


290 


Share of top decile in national income 


TWO WORLDS 



FIGURE 8.5. Income inequality in the United States, 1910-2010 

The top decile income share rose from less than 35 percent of total income in the 1970s 

to almost 50 percent in the 2000S-2010S. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


percent, we find even greater increases, with hikes in purchasing power greater 
than 50 percent in ten years. 22 In a context of very low growth and virtual 
stagnation of purchasing power for the vast majority of workers, raises of this 
magnitude for top earners have not failed to attract attention. Furthermore, 
the phenomenon was radically new, and in order to interpret it correctly, we 
must view it in international perspective. 

A More Complex Case: The Transformation of 
Inequality in the United States 

Indeed, let me turn now to the US case, which stands out precisely because it 
was there that a subclass of “supermanagers” first emerged over the past sev¬ 
eral decades. I have done everything possible to ensure that the data series for 
the United States are as comparable as possible with the French series. In par¬ 
ticular, Figures 8.5 and 8.6 represent the same data for the United States as 
Figures 8.1 and 8.2 for France: the goal is to compare, in the first figure of each 
pair, the evolution of the shares of income going to the top decile and top 


291 


































Share of the different groups in total income 


THE STRUCTURE OF INEQUALITY 



figure 8.6. Decomposition of the top decile, United States, 1910-2010 

The rise of the top decile income share since the 1970s is mostly due to the top 
percentile. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


centile of the wage hierarchy and to compare, in the second figure, the wage 
hierarchies themselves. I should add that the United States first instituted a 
federal income tax in 1913, concluding a long battle with the Supreme Court. 23 
The data derived from US income tax returns are on the whole quite compa¬ 
rable to the French data, though somewhat less detailed. In particular, total 
income can be gleaned from US statements from 1913 on, but we do not have 
separate information on income from labor until 1927, so the series dealing 
with the wage distribution in the United States before 1927 are somewhat less 
reliable. 24 

When we compare the French and US trajectories, a number of similari¬ 
ties stand out, but so do certain important differences. I shall begin by exam¬ 
ining the overall evolution of the share of income going to the top decile 
(Figure 8.6). The most striking fact is that the United States has become no¬ 
ticeably more inegalitarian than France (and Europe as a whole) from the 
turn of the twentieth century until now, even though the United States was 
more egalitarian at the beginning of this period. What makes the US case 
complex is that the end of the process did not simply mark a return to the sit- 


292 
































TWO WORLDS 


uation that had existed at the beginning: US inequality in 2010 is quantita¬ 
tively as extreme as in old Europe in the first decade of the twentieth century, 
but the structure of that inequality is rather clearly different. 

I will proceed systematically. First, European income inequality was sig¬ 
nificantly greater than US income inequality at the turn of the twentieth 
century. In 1900-1910, according to the data at our disposal, the top decile of 
the income hierarchy received a little more than 40 percent of total national 
income in the United States, compared with 45-50 percent in France (and 
very likely somewhat more in Britain). This reflects two differences. First, the 
capital/income ratio was higher in Europe, and so was capital’s share of na¬ 
tional income. Second, inequality of ownership of capital was somewhat less 
extreme in the New World. Clearly, this does not mean that American soci¬ 
ety in 1900-1910 embodied the mythical ideal of an egalitarian society of pio¬ 
neers. In fact, American society was already highly inegalitarian, much more 
than Europe today, for example. One has only to reread Henry James or note 
that the dreadful Hockney who sailed in luxury on Titanic in 1912 existed in 
real life and not just in the imagination of James Cameron to convince one¬ 
self that a society of rentiers existed not only in Paris and London but also in 
turn-of-the-century Boston, New York, and Philadelphia. Nevertheless, capi¬ 
tal (and therefore the income derived from it) was distributed somewhat less 
unequally in the United States than in France or Britain. Concretely, US rent¬ 
iers were fewer in number and not as rich (compared to the average US stan¬ 
dard of living) as their European counterparts. I will need to explain why this 
was so. 

Income inequality increased quite sharply in the United States during the 
1920s, however, peaking on the eve of the 1929 crash with more than 50 per¬ 
cent of national income going to the top decile—a level slightly higher than 
in Europe at the same time, as a result of the substantial shocks to which Eu¬ 
ropean capital had already been subjected since 1914. Nevertheless, US ine¬ 
quality was not the same as European inequality: note the already crucial 
importance of capital gains in top US incomes during the heady stock market 
ascent of the 1920s (see Figure 8.5). 

During the Great Depression, which hit the United States particularly 
hard, and again during World War II, when the nation was fully mobilized 
behind the war effort (and the effort to end the economic crisis), income 
inequality was substantially compressed, a compression comparable in some 


293 


THE STRUCTURE OF INEQUALITY 


respects to what we observe in Europe in the same period. Indeed, as we saw 
in Part Two, the shocks to US capital were far from negligible: although there 
was no physical destruction due to war, the Great Depression was a major 
shock and was followed by substantial tax shocks imposed by the federal gov¬ 
ernment in the 1930s and 1940s. If we look at the period 1910-1950 as a whole, 
however, we find that the compression of inequality was noticeably smaller in 
the United States than in France (and, more generally, Europe). To sum up: 
inequality in the United States started from a lower peak on the eve of World 
War I but at its low point after World War II stood above inequality in Eu¬ 
rope. Europe in 1914-1945 witnessed the suicide of rentier society, but noth¬ 
ing of the sort occurred in the United States. 

The Explosion of US Inequality after 1980 

Inequality reached its lowest ebb in the United States between 1950 and 1980: 
the top decile of the income hierarchy claimed 30 to 35 percent of US national 
income, or roughly the same level as in France today. This is what Paul Krug- 
man nostalgically refers to as “the America we love”—the America of his 
childhood. 25 In the 1960s, the period of the TV series Mad Men and General 
de Gaulle, the United States was in fact a more egalitarian society than France 
(where the upper decile’s share had increased dramatically to well above 35 
percent), at least for those US citizens whose skin was white. 

Since 1980, however, income inequality has exploded in the United States. 
The upper decile’s share increased from 30-35 percent of national income in 
the 1970s to 45-50 percent in the 2000s—an increase of 15 points of national 
income (see Figure 8.5). The shape of the curve is rather impressively steep, and 
it is natural to wonder how long such a rapid increase can continue: if change 
continues at the same pace, for example, the upper decile will be raking in 60 
percent of national income by 2030. 

It is worth taking a moment to clarify several points about this evolution. 
First, recall that the series represented in Figure 8.5, like all the series in the 
WTID, take account only of income declared in tax returns and in particular 
do not correct for any possible understatement of capital income for legal or 
extralegal reasons. Given the widening gap between the total capital income 
(especially dividends and interest) included in US national accounts and the 
amount declared in income tax returns, and given, too, the rapid development 


294 


TWO WORLDS 


of tax havens (flows to which are, in all likelihood, mostly not even included 
in national accounts), it is likely that Figure 8.5 underestimates the amount by 
which the upper decile’s share actually increased. By comparing various avail¬ 
able sources, it is possible to estimate that the upper decile’s share slightly ex¬ 
ceeded 50 percent of US national income on the eve of the financial crisis of 
2008 and then again in the early 2010s. 26 

Note, moreover, that stock market euphoria and capital gains can account 
for only part of the structural increase in the top decile’s share over the past 
thirty or forty years. To be sure, capital gains in the United States reached 
unprecedented heights during the Internet bubble in 2000 and again in 2007: 
in both cases, capital gains alone accounted for about five additional points of 
national income for the upper decile, which is an enormous amount. The pre¬ 
vious record, set in 1928 on the eve of the 1929 stock market crash, was roughly 
3 points of national income. But such levels cannot be sustained for very long, 
as the large annual variations evident in Figure 8.5 show. The incessant short¬ 
term fluctuations of the stock market add considerable volatility to the evolu¬ 
tion of the upper decile’s share (and certainly contribute to the volatility of 
the US economy as a whole) but do not contribute much to the structural in¬ 
crease of inequality. If we simply ignore capital gains (which is not a satisfac¬ 
tory method either, given the importance of this type of remuneration in the 
United States), we still find almost as great an increase in the top decile’s 
share, which rose from around 32 percent in the 1970s to more than 46 per¬ 
cent in 2010, or fourteen points of national income (see Figure 8.5). Capital 
gains oscillated around one or two points of additional national income for 
the top decile in the 1970s and around two to three points between 2000 and 
2010 (excluding exceptionally good and bad years). The structural increase is 
therefore on the order of one point: this is not nothing, but then again it is 
not much compared with the fourteen-point increase of the top decile’s share 
exclusive of capital gains. 27 

Looking at evolutions without capital gains also allows us to identify the 
structural character of the increase of inequality in the United States more 
clearly. In fact, from the late 1970s to 2010, the increase in the upper decile’s 
share (exclusive of capital gains) appears to have been relatively steady and 
constant: it passed 35 percent in the 1980s, then 40 percent in the 1990s, and 
finally 45 percent in the 2000s (see Figure 8.5). 28 Much more striking is the 
fact that the level attained in 2010 (with more than 46 percent of national 


295 


THE STRUCTURE OF INEQUALITY 


income, exclusive of capital gains, going to the top decile) is already signifi¬ 
cantly higher than the level attained in 2007, on the eve of the financial crisis. 
Early data for 2011-2012 suggest that the increase is still continuing. 

This is a crucial point: the facts show quite clearly that the financial crisis 
as such cannot be counted on to put an end to the structural increase of ine¬ 
quality in the United States. To be sure, in the immediate aftermath of a 
stock market crash, inequality always grows more slowly, just as it always grows 
more rapidly in a boom. The years 2008-2009, following the collapse of 
Lehman Brothers, like the years 2001-2002, after the bursting of the first 
Internet bubble, were not great times for taking profits on the stock market. 
Indeed, capital gains plummeted in those years. But these short-term move¬ 
ments did not alter the long-run trend, which is governed by other forces 
whose logic I must now try to clarify. 

To proceed further, it will be useful to break the top decile of the income 
hierarchy down into three groups: the richest 1 percent, the next 4 percent, 
and the bottom 5 percent (see Figure 8.6). The bulk of the growth of inequal¬ 
ity came from “the 1 percent,” whose share of national income rose from 9 
percent in the 1970s to about 20 percent in 2000-2010 (with substantial year- 
to-year variation due to capital gains)—an increase of 11 points. To be sure, 
“the 5 percent” (whose annual income ranged from $108,000 to $150,000 per 
household in 2010) as well as “the 4 percent” (whose income ranged from 
$150,000 to $352,000) also experienced substantial increases: the share of the 
former in US national income rose from 11 to 12 percent (or one point), and 
that of the latter rose from 13 to 16 percent (three points). 29 By definition, that 
means that since 1980, these social groups have experienced income growth 
substantially higher than the average growth of the US economy, which is not 
negligible. 

Among the members of these upper income groups are US academic econ¬ 
omists, many of whom believe that the economy of the United States is work¬ 
ing fairly well and, in particular, that it rewards talent and merit accurately 
and precisely. This is a very comprehensible human reaction. 30 But the truth is 
that the social groups above them did even better: of the 15 additional points 
of national income going to the top decile, around 11 points, or nearly three- 
quarters of the total, went to “the 1 percent” (those making more than $352,000 
a year in 2010), of which roughly half went to “the 0.1 percent” (those making 
more than $1.5 million a year). 31 


296 


TWO WORLDS 


Did the Increase of Inequality Cause the Financial Crisis? 

As I have just shown, the financial crisis as such seems not to have had an im¬ 
pact on the structural increase of inequality. What about the reverse causal¬ 
ity? Is it possible that the increase of inequality in the United States helped to 
trigger the financial crisis of 2008? Given the fact that the share of the upper 
decile in US national income peaked twice in the past century, once in 1928 
(on the eve of the crash of 1929) and again in 2007 (on the eve of the crash of 
2008), the question is difficult to avoid. 

In my view, there is absolutely no doubt that the increase of inequality in 
the United States contributed to the nation’s financial instability. The reason is 
simple: one consequence of increasing inequality was virtual stagnation of the 
purchasing power of the lower and middle classes in the United States, which 
inevitably made it more likely that modest households would take on debt, es¬ 
pecially since unscrupulous banks and financial intermediaries, freed from 
regulation and eager to earn good yields on the enormous savings injected into 
the system by the well-to-do, offered credit on increasingly generous terms. 32 

In support of this thesis, it is important to note the considerable transfer 
of US national income—on the order of 15 points—from the poorest 90 per¬ 
cent to the richest 10 percent since 1980. Specifically, if we consider the total 
growth of the US economy in the thirty years prior to the crisis, that is, from 
1977 to 2007, we find that the richest 10 percent appropriated three-quarters 
of the growth. The richest 1 percent alone absorbed nearly 60 percent of the 
total increase of US national income in this period. Hence for the bottom 90 
percent, the rate of income growth was less than 0.5 percent per year. 33 These 
figures are incontestable, and they are striking: whatever one thinks about the 
fundamental legitimacy of income inequality, the numbers deserve close scru¬ 
tiny. 34 It is hard to imagine an economy and society that can continue func¬ 
tioning indefinitely with such extreme divergence between social groups. 

Quite obviously, if the increase in inequality had been accompanied by 
exceptionally strong growth of the US economy, things would look quite dif¬ 
ferent. Unfortunately, this was not the case: the economy grew rather more 
slowly than in previous decades, so that the increase in inequality led to vir¬ 
tual stagnation of low and medium incomes. 

Note, too, that this internal transfer between social groups (on the order 
of fifteen points of US national income) is nearly four times larger than the 


297 


THE STRUCTURE OF INEQUALITY 


impressive trade deficit the United States ran in the 2000s (on the order of 
four points of national income). The comparison is interesting because the 
enormous trade deficit, which has its counterpart in Chinese, Japanese, and 
German trade surpluses, has often been described as one of the key contribu¬ 
tors to the “global imbalances” that destabilized the US and global financial 
system in the years leading up to the crisis of 2008. That is quite possible, but 
it is important to be aware of the fact that the United States’ internal imbal¬ 
ances are four times larger than its global imbalances. This suggests that the 
place to look for the solutions of certain problems may be more within the 
United States than in China or other countries. 

That said, it would be altogether too much to claim that the increase of in¬ 
equality in the United States was the sole or even primary cause of the finan¬ 
cial crisis of 2008 or, more generally, of the chronic instability of the global 
financial system. To my mind, a potentially more important cause of instabil¬ 
ity is the structural increase of the capital/income ratio (especially in Europe), 
coupled with an enormous increase in aggregate international asset positions. 35 

The Rise of Supersalaries 

Let me return now to the causes of rising inequality in the United States. The 
increase was largely the result of an unprecedented increase in wage inequal¬ 
ity and in particular the emergence of extremely high remunerations at the 
summit of the wage hierarchy, particularly among top managers of large firms 
(see Figures 8.7 and 8.8). 

Broadly speaking, wage inequality in the United States changed in major 
ways over the past century: the wage hierarchy expanded in the 1920s, was rela¬ 
tively stable in the 1930s, and then experienced severe compression during 
World War II. The phase of “severe compression” has been abundantly studied. 
An important role was played by the National War Labor Board, the govern¬ 
ment agency that had to approve all wage increases in the United States from 
1941 to 1945 and generally approved raises only for the lowest paid workers. In 
particular, managers’ salaries were systematically frozen in nominal terms and 
even at the end of the war were raised only moderately. 36 During the 1930s, 
wage inequality in the United States stabilized at a relatively low level, lower 
than in France, for example: the share of income going to the upper decile was 
about 25 percent, and the share of the upper centile was 5 or 6 percent. Then, 


298 


Share of top decile in total (income or wages) 


TWO WORLDS 



figure 8.7. High incomes and high wages in the United States, 1910-2010 

The rise of income inequality since the 1970s is largely due to the rise of wage inequality. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


from the mid-1970s on, the top 10 percent and, even more, the top 1 percent 
began to claim a share of labor income that grew more rapidly than the average 
wage. All told, the upper decile’s share rose from 25 to 35 percent, and this in¬ 
crease of ten points explains approximately two-thirds of the increase in the 
upper decile’s share of total national income (see Figures 8.7 and 8.8). 

Several points call for additional comment. First, this unprecedented in¬ 
crease in wage inequality does not appear to have been compensated by in¬ 
creased wage mobility over the course of a person’s career. 37 This is a signifi¬ 
cant point, in that greater mobility is often mentioned as a reason to believe 
that increasing inequality is not that important. In fact, if each individual 
were to enjoy a very high income for part of his or her life (for example, if each 
individual spent a year in the upper centile of the income hierarchy), then an 
increase in the level characterized as “very high pay” would not necessarily 
imply that inequality with respect to labor—measured over a lifetime—had 
truly increased. The familiar mobility argument is powerful, so powerful that 
it is often impossible to verify. But in the US case, government data allow us 
to measure the evolution of wage inequality with mobility taken into account: 
we can compute average wages at the individual level over long periods of time 


299 




































THE STRUCTURE OF INEQUALITY 



figure 8.8. The transformation of the top i percent in the United States 

The rise in the top i percent highest incomes since the 1970s is largely due to the rise in 

the top 1 percent highest wages. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


(ten, twenty, or thirty years). And what we find is that the increase in wage 
inequality is identical in all cases, no matter what reference period we 
choose. 38 In other words, workers at McDonald’s or in Detroit’s auto plants 
do not spend a year of their lives as top managers of large US firms, any more 
than professors at the University of Chicago or middle managers from Cali¬ 
fornia do. One may have felt this intuitively, but it is always better to measure 
systematically wherever possible. 

Cohabitation in the Upper Centile 

Furthermore, the fact that the unprecedented increase of wage inequality ex¬ 
plains most of the increase in US income inequality does not mean that in¬ 
come from capital played no role. It is important to dispel the notion that 
capital income has vanished from the summit of the US social hierarchy. 

In fact, a very substantial and growing inequality of capital income since 
1980 accounts for about one-third of the increase in income inequality in the 
United States—a far from negligible amount. Indeed, in the United States, as 


300 



















































Share in total income of various fractiles 


TWO WORLDS 



figure 8.9. The composition of top incomes in the United States in 1929 

Labor income becomes less and less important as one moves up within the top income 

decile. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


in France and Europe, today as in the past, income from capital always be¬ 
comes more important as one climbs the rungs of the income hierarchy. Tem¬ 
poral and spatial differences are differences of degree: though large, the gen¬ 
eral principle remains. As Edward Wolff and Ajit Zacharias have pointed out, 
the upper centile always consists of several different social groups, some with 
very high incomes from capital and others with very high incomes from labor; 
the latter do not supplant the former. 39 

In the US case, as in France but to an even greater degree, the difference 
today is that one has to climb much further up the income hierarchy before 
income from capital takes the upper hand. In 1929, income from capital (es¬ 
sentially dividends and capital gains) was the primary resource for the top 1 
percent of the income hierarchy (see Figure 8.9). In 2007, one has to climb to 
the 0.1 percent level before this is true (see Figure 8.10). Again, I should make 
it clear that this has to do with the inclusion of capital gains in income from 
capital: without capital gains, salaries would be the main source of income up 
to the 0.01 percent level of the income hierarchy. 40 


301 



















Share in total income of various fractiles 


THE STRUCTURE OF INEQUALITY 



figure 8.10. The composition of top incomes in the United States, 2007 
Capital income becomes dominant at the level of top 0.1 percent in 2007, as opposed 
to the top 1 percent in 1929. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


The final and perhaps most important point in need of clarification is that 
the increase in very high incomes and very high salaries primarily reflects the 
advent of “supermanagers,” that is, top executives of large firms who have 
managed to obtain extremely high, historically unprecedented compensation 
packages for their labor. If we look only at the five highest paid executives in 
each company listed on the stock exchange (which are generally the only com¬ 
pensation packages that must be made public in annual corporate reports), we 
come to the paradoxical conclusion that there are not enough top corporate 
managers to explain the increase in very high US incomes, and it therefore 
becomes difficult to explain the evolutions we observe in incomes stated on 
federal income tax returns. 41 But the fact is that in many large US firms, there 
are far more than five executives whose pay places them in the top 1 percent 
(above $352,000 in 2010) or even the top 0.1 percent (above $1.5 million). 

Recent research, based on matching declared income on tax returns with 
corporate compensation records, allows me to state that the vast majority (60 
to 70 percent, depending on what definitions one chooses) of the top 0.1 per¬ 
cent of the income hierarchy in 2000-2010 consists of top managers. By com- 


302 




















TWO WORLDS 


parison, athletes, actors, and artists of all kinds make up less than 5 percent of 
this group. 42 In this sense, the new US inequality has much more to do with 
the advent of “supermanagers” than with that of “superstars.” 43 

It is also interesting to note that the financial professions (including both 
managers of banks and other financial institutions and traders operating on 
the financial markets) are about twice as common in the very high income 
groups as in the economy overall (roughly 20 percent of top 0.1 percent, 
whereas finance accounts for less than 10 percent of GDP). Nevertheless, 80 
percent of the top income groups are not in finance, and the increase in the 
proportion of high-earning Americans is explained primarily by the skyrock¬ 
eting pay packages of top managers of large firms in the nonfinancial as well 
as financial sectors. 

Finally, note that in accordance with US tax laws as well as economic 
logic, I have included in wages all bonuses and other incentives paid to top 
managers, as well as the value of any stock options (a form of remuneration 
that has played an important role in the increase of wage inequality depicted 
in Figures 8.9 and 8.io). 44 The very high volatility of incentives, bonuses, and 
option prices explains why top incomes fluctuated so much in the period 
2000-2010. 


303 


{ NINE } 


Inequality of Labor Income 


Now that I have introduced the evolution of income and wages in France and 
the United States since the beginning of the twentieth century, I will exam¬ 
ine the changes I have observed and consider how representative they are of 
long-term changes in other developed and emerging economies. 

I will begin by examining in this chapter the dynamics of labor income 
inequality. What caused the explosion of wage inequalities and the rise of the 
supermanager in the United States after 1980? More generally, what accounts 
for the diverse historical evolutions we see in various countries? 

In subsequent chapters I will look into the evolution of the capital ownership 
distribution: How and why has the concentration of wealth decreased every¬ 
where, but especially in Europe, since the turn of the twentieth century? The 
emergence of a “patrimonial middle class” is a crucial issue for this study, because 
it largely explains why income inequality decreased during the first half of the 
twentieth century and why we in the developed countries have gone from a soci¬ 
ety of rentiers to a society of managers (or, in the less optimistic version, from a 
society of superrentiers to a somewhat less extreme form of rentier society). 

Wage Inequality: A Race betiveen Education and Technology? 

Why is inequality of income from labor, and especially wage inequality, 
greater in some societies and periods than others? The most widely accepted 
theory is that of a race between education and technology. To be blunt, this 
theory does not explain everything. In particular, it does not offer a satisfac¬ 
tory explanation of the rise of the supermanager or of wage inequality in the 
United States after 1980. The theory does, however, suggest interesting and 
important clues for explaining certain historical evolutions. I will therefore 
begin by discussing it. 

The theory rests on two hypotheses. First, a worker’s wage is equal to his 
marginal productivity, that is, his individual contribution to the output of the 


304 


INEQUALITY OF LABOR INCOME 


firm or office for which he works. Second, the worker’s productivity depends 
above all on his skill and on supply and demand for that skill in a given soci¬ 
ety. For example, in a society in which very few people are qualified engineers 
(so that the “supply” of engineers is low) and the prevailing technology re¬ 
quires many engineers (so that “demand” is high), then it is highly likely that 
this combination of low supply and high demand will result in very high pay 
for engineers (relative to other workers) and therefore significant wage ine¬ 
quality between highly paid engineers and other workers. 

This theory is in some respects limited and naive. (In practice, a worker’s 
productivity is not an immutable, objective quantity inscribed on his fore¬ 
head, and the relative power of different social groups often plays a central 
role in determining what each worker is paid.) Nevertheless, as simple or even 
simplistic as the theory may be, it has the virtue of emphasizing two social 
and economic forces that do indeed play a fundamental role in determining 
wage inequality, even in more sophisticated theories: the supply and demand of 
skills. In practice, the supply of skills depends on, among other things, the state 
of the educational system: how many people have access to this or that track, 
how good is the training, how much classroom teaching is supplemented by ap¬ 
propriate professional experience, and so on. The demand for skills depends on, 
among other things, the state of the technologies available to produce the goods 
and services that society consumes. No matter what other forces may be in¬ 
volved, it seems clear that these two factors—the state of the training system on 
the one hand, the state of technology on the other—play a crucial role. At a 
minimum, they influence the relative power of different social groups. 

These two factors themselves depend on many other forces. The educa¬ 
tional system is shaped by public policy, criteria of selection for different 
tracks, the way it is financed, the cost of study for students and their families, 
and the availability of continuing education. Technological progress depends 
on the pace of innovation and the rapidity of implementation. It generally 
increases the demand for new skills and creates new occupations. This leads 
to the idea of a race between education and technology: if the supply of skills 
does not increase at the same pace as the needs of technology, then groups 
whose training is not sufficiently advanced will earn less and be relegated to 
devalued lines of work, and inequality with respect to labor will increase. In 
order to avoid this, the educational system must increase its supply of new 
types of training and its output of new skills at a sufficiently rapid pace. If 


305 


THE STRUCTURE OF INEQUALITY 


equality is to decrease, moreover, the supply of new skills must increase even 
more rapidly, especially for the least well educated. 

Consider, for example, wage inequalities in France. As I have shown, the 
wage hierarchy was fairly stable over a long period of time. The average wage in¬ 
creased enormously over the course of the twentieth century, but the gap be¬ 
tween the best and worst paid deciles remained the same. Why was this the case, 
despite the massive democratization of the educational system during the same 
period? The most natural explanation is that all skill levels progressed at roughly 
the same pace, so that the inequalities in the wage scale were simply translated 
upward. The bottom group, which had once only finished grade school, moved 
up a notch on the educational ladder, first completing junior high school, then 
going on to a high school diploma. But the group that had previously made do 
with a high school diploma now went on to college or even graduate school. In 
other words, the democratization of the educational system did not eliminate 
educational inequality and therefore did not reduce wage inequality. If educa¬ 
tional democratization had not taken place, however, and if the children of those 
who had only finished grade school a century ago (three-quarters of each genera¬ 
tion at that time) had remained at that level, inequalities with respect to labor, 
and especially wage inequalities, would surely have increased substantially. 

Now consider the US case. Two economists, Claudia Goldin and Lawrence 
Katz, systematically compared the following two evolutions in the period 
1890-2005: on the one hand the wage gap between workers who graduated 
from college and those who had only a high school diploma, and on the other 
the rate of growth of the number of college degrees. For Goldin and Katz, the 
conclusion is stark: the two curves move in opposite directions. In particular, 
the wage gap, which decreased fairly regularly until the 1970s, suddenly begins 
to widen in the 1980s, at precisely the moment when for the first time the num¬ 
ber of college graduates stops growing, or at any rate grows much more slowly 
than before. 1 Goldin and Katz have no doubt that increased wage inequality in 
the United States is due to a failure to invest sufficiently in higher education. 
More precisely, too many people failed to receive the necessary training, in part 
because families could not afford the high cost of tuition. In order to reverse 
this trend, they conclude, the United States should invest heavily in education 
so that as many people as possible can attend college. 

The lessons of French and US experience thus point in the same direction. 
In the long run, the best way to reduce inequalities with respect to labor as 


306 


INEQUALITY OF LABOR INCOME 


well as to increase the average productivity of the labor force and the overall 
growth of the economy is surely to invest in education. If the purchasing 
power of wages increased fivefold in a century, it was because the improved 
skills of the workforce, coupled with technological progress, increased output 
per head fivefold. Over the long run, education and technology are the deci¬ 
sive determinants of wage levels. 

By the same token, if the United States (or France) invested more heavily 
in high-quality professional training and advanced educational opportunities 
and allowed broader segments of the population to have access to them, this 
would surely be the most effective way of increasing wages at the low to me¬ 
dium end of the scale and decreasing the upper decile’s share of both wages 
and total income. All signs are that the Scandinavian countries, where wage 
inequality is more moderate than elsewhere, owe this result in large part to 
the fact that their educational system is relatively egalitarian and inclusive. 2 
The question of how to pay for education, and in particular how to pay for 
higher education, is everywhere one of the key issues of the twenty-first cen¬ 
tury. Unfortunately, the data available for addressing issues of educational 
cost and access in the United States and France are extremely limited. Both 
countries attach a great deal of importance to the central role of schools and 
vocational training in fostering social mobility, yet theoretical discussion of 
educational issues and of meritocracy is often out of touch with reality, and in 
particular with the fact that the most prestigious schools tend to favor stu¬ 
dents from privileged social backgrounds. I will come back to this point in 
Chapter 13. 

The Limits of the Theoretical Model: The Role of Institutions 

Education and technology definitely play a crucial role in the long run. This 
theoretical model, based on the idea that a worker’s wage is always perfectly 
determined by her marginal productivity and thus primarily by skill, is never¬ 
theless limited in a number of ways. Leave aside the fact that it is not always 
enough to invest in training: existing technology is sometimes unable to make 
use of the available supply of skills. Leave aside, too, the fact that this theoretical 
model, at least in its most simplistic form, embodies a far too instrumental 
and utilitarian view of training. The main purpose of the health sector is not 
to provide other sectors with workers in good health. By the same token, the 


307 


THE STRUCTURE OF INEQUALITY 


main purpose of the educational sector is not to prepare students to take up 
an occupation in some other sector of the economy. In all human societies, 
health and education have an intrinsic value: the ability to enjoy years of good 
health, like the ability to acquire knowledge and culture, is one of the funda¬ 
mental purposes of civilization. 3 We are free to imagine an ideal society in 
which all other tasks are almost totally automated and each individual has as 
much freedom as possible to pursue the goods of education, culture, and health 
for the benefit of herself and others. Everyone would be by turns teacher or 
student, writer or reader, actor or spectator, doctor or patient. As noted in 
Chapter 2, we are to some extent already on this path: a characteristic feature 
of modern growth is the considerable share of both output and employment 
devoted to education, culture, and medicine. 

While awaiting the ideal society of the future, let us try to gain a better 
understanding of wage inequality today. In this narrower context, the main 
problem with the theory of marginal productivity is quite simply that it fails 
to explain the diversity of the wage distributions we observe in different coun¬ 
tries at different times. In order to understand the dynamics of wage inequal¬ 
ity, we must introduce other factors, such as the institutions and rules that 
govern the operation of the labor market in each society. To an even greater 
extent than other markets, the labor market is not a mathematical abstraction 
whose workings are entirely determined by natural and immutable mecha¬ 
nisms and implacable technological forces: it is a social construct based on 
specific rules and compromises. 

In the previous chapter I noted several important episodes of compression 
and expansion of wage hierarchies that are very difficult to explain solely in 
terms of the supply of and demand for various skills. For example, the compres¬ 
sion of wage inequalities that occurred in both France and the United States 
during World Wars I and II was the result of negotiations over wage scales in 
both the public and private sectors, in which specific institutions such as the 
National War Fabor Board (created expressly for the purpose) played a central 
role. I also called attention to the importance of changes in the minimum wage 
for explaining the evolution of wage inequalities in France since 1950, with three 
clearly identified subperiods: 1950-1968, during which the minimum wage was 
rarely adjusted and the wage hierarchy expanded; 1968-1983, during which the 
minimum wage rose very rapidly and wage inequalities decreased sharply; and 
finally 1983-2012, during which the minimum wage increased relatively slowly 


308 


ly minimum wage 


INEQUALITY OF LABOR INCOME 



figure 9.1. Minimum wage in France and the United States, 1950-2013 

Expressed in 2013 purchasing power, the hourly minimum wage rose from $3.80 to 
$7.30 between 1950 and 2013 in the United States, and from €2.10 to €9.40 in France. 
Sources and series: see piketty.pse.ens.fr/capital21c. 

and the wage hierarchy tended to expand. 4 At the beginning of 2013, the mini¬ 
mum wage in France stood at 9.43 euros per hour. 

In the United States, a federal minimum wage was introduced in 1933, 
nearly twenty years earlier than in France. 5 As in France, changes in the 
minimum wage played an important role in the evolution of wage inequali¬ 
ties in the United States. It is striking to learn that in terms of purchasing 
power, the minimum wage reached its maximum level nearly half a century 
ago, in 1969, at $1.60 an hour (or $10.10 in 2013 dollars, taking account of 
inflation between 1968 and 2013), at a time when the unemployment rate was 
below 4 percent. Front 1980 to 1990, under the presidents Ronald Reagan 
and George Fd. W. Bush, the federal minimum wage remained stuck at $3.35, 
which led to a significant decrease in purchasing power when inflation is 
factored in. It then rose to $5.25 under Bill Clinton in the 1990s and was 
frozen at that level under George W. Bush before being increased several 
times by Barack Obama after 2008. At the beginning of 2013 it stood at $7.25 
an hour, or barely 6 euros, which is a third below the French minimum wage, 
the opposite of the situation that obtained in the early 1980s (see Figure 9.1). 6 


309 













































THE STRUCTURE OF INEQUALITY 


President Obama, in his State of the Union address in February 2013, an¬ 
nounced his intention to raise the minimum wage to about $9 an hour for 
the period 2013-2016/ 

Inequalities at the bottom of the US wage distribution have closely fol¬ 
lowed the evolution of the minimum wage: the gap between the bottom 10 
percent of the wage distribution and the overall average wage widened signifi¬ 
cantly in the 1980s, then narrowed in the 1990s, and finally increased again in 
the 2000s. Nevertheless, inequalities at the top of the distribution—for ex¬ 
ample, the share of total wages going to the top 10 percent—increased steadily 
throughout this period. Clearly, the minimum wage has an impact at the 
bottom of the distribution but much less influence at the top, where other 
forces are at work. 

Wage Scales and the Minimum Wage 

There is no doubt that the minimum wage plays an essential role in the for¬ 
mation and evolution of wage inequalities, as the French and US experiences 
show. Each country has its own history in this regard and its own peculiar 
chronology. There is nothing surprising about that: labor market regulations 
depend on each society’s perceptions and norms of social justice and are inti¬ 
mately related to each country’s social, political, and cultural history. The 
United States used the minimum wage to increase lower-end wages in the 
1950s and 1960s but abandoned this tool in the 1970s. In France, it was ex¬ 
actly the opposite: the minimum wage was frozen in the 1950s and 1960s but 
was used much more often in the 1970s. Figure 9.1 illustrates this striking 
contrast. 

It would be easy to multiply examples from other countries. Britain in¬ 
troduced a minimum wage in 1999, at a level between the United States and 
France: in 2013 it was £6.19 (or about 8.05 euros). 8 Germany and Sweden 
have chosen to do without minimum wages at the national level, leaving 
it to trade unions to negotiate not only minimums but also complete 
wage schedules with employers in each branch of industry. In practice, the 
minimum wage in both countries was about 10 euros an hour in 2013 in 
many branches (and therefore higher than in countries with a national min¬ 
imum wage). But minimum pay can be markedly lower in sectors that are 


310 


INEQUALITY OF LABOR INCOME 


relatively unregulated or underunionized. In order to set a common floor, 
Germany is contemplating the introduction of a minimum wage in 2013- 
2014. This is not the place to write a detailed history of minimum wages 
and wage schedules around the world or to discuss their impact on wage 
inequality. My goal here is more modest: simply to indicate briefly what 
general principles can be used to analyze the institutions that regulate wage 
setting everywhere. 

What is in fact the justification for minimum wages and rigid wage 
schedules? First, it is not always easy to measure the marginal productivity of 
a particular worker. In the public sector, this is obvious, but it is also clear in 
the private sector: in an organization employing dozens or even thousands of 
workers, it is no simple task to judge each individual worker’s contribution to 
overall output. To be sure, one can estimate marginal productivity, at least 
for jobs that can be replicated, that is, performed in the same way by any 
number of employees. For an assembly-line worker or McDonald’s server, 
management can calculate how much additional revenue an additional 
worker or server would generate. Such an estimate would be approximate, 
however, yielding a range of productivities rather than an absolute number. 
In view of this uncertainty, how should the wage be set? There are many rea¬ 
sons to think that granting management absolute power to set the wage of 
each employee on a monthly or (why not?) daily basis would not only intro¬ 
duce an element of arbitrariness and injustice but would also be inefficient 
for the firm. 

In particular, it may be efficient for the firm to ensure that wages remain 
relatively stable and do not vary constantly with fluctuations in sales. The 
owners and managers of the firm usually earn much more and are signifi¬ 
cantly wealthier than their workers and can therefore more easily absorb 
short-term shocks to their income. Under such circumstances, it can be in 
everyone’s interest to provide a kind of “wage insurance” as part of the em¬ 
ployment contract, in the sense that the worker’s monthly wage is guaranteed 
(which does not preclude the use of bonuses and other incentives). The pay¬ 
ment of a monthly rather than a daily wage was a revolutionary innovation 
that gradually took hold in all the developed countries during the twentieth 
century. This innovation was inscribed in law and became a feature of wage 
negotiations between workers and employers. The daily wage, which had been 


311 


THE STRUCTURE OF INEQUALITY 


the norm in the nineteenth century, gradually disappeared. This was a crucial 
step in the constitution of the working class: workers now enjoyed a legal sta¬ 
tus and received a stable, predictable remuneration for their work. This clearly 
distinguished them from day laborers and piece workers—the typical em¬ 
ployees of the eighteenth and nineteenth centuries. 9 

This justification of setting wages in advance obviously has its limits. The 
other classic argument in favor of minimum wages and fixed wage schedules 
is the problem of “specific investments.” Concretely, the particular functions 
and tasks that a firm needs to be performed often require workers to make 
specific investments in the firm, in the sense that these investments are of no 
(or limited) value to other firms: for instance, workers might need to learn 
specific work methods, organizational methods, or skills linked to the firm’s 
production process. If wages can be set unilaterally and changed at any mo¬ 
ment by the firm, so that workers do not know in advance how much they 
will be paid, then it is highly likely that they will not invest as much in the 
firm as they should. It may therefore be in everyone’s interest to set pay scales 
in advance. The same “specific investments” argument can also apply to other 
decisions by the firm, and it is the main reason for limiting the power of 
stockholders (who are seen as having too short-term an outlook in some cases) 
in favor of a power-sharing arrangement with a broader group of “stakehold¬ 
ers” (including the firm’s workers), as in the “Rhenish model” of capitalism 
discussed earlier, in Part Two. This is probably the most important argument 
in favor of fixed wage scales. 

More generally, insofar as employers have more bargaining power than 
workers and the conditions of “pure and perfect” competition that one finds 
in the simplest economic models fail to be satisfied, it may be reasonable to 
limit the power of employers by imposing strict rules on wages. For example, 
if a small group of employers occupies a monopsony position in a local labor 
market (meaning that they are virtually the only source of employment, per¬ 
haps because of the limited mobility of the local labor force), they will proba¬ 
bly try to exploit their advantage by lowering wages as much as possible, pos¬ 
sibly even below the marginal productivity of the workers. Under such 
conditions, imposing a minimum wage may be not only just but also efficient, 
in the sense that the increase in wages may move the economy closer to the 
competitive equilibrium and increase the level of employment. This theoreti¬ 
cal model, based on imperfect competition, is the clearest justification for the 


312 


INEQUALITY OF LABOR INCOME 


existence of a minimum wage: the goal is to make sure that no employer can 
exploit his competitive advantage beyond a certain limit. 

Again, everything obviously depends on the level of the minimum wage. 
The limit cannot be set in the abstract, independent of the country’s general 
skill level and average productivity. Various studies carried out in the United 
States between 1980 and 2000, most notably by the economists David Card 
and Alan Krueger, showed that the US minimum wage had fallen to a level so 
low in that period that it could be raised without loss of employment, indeed 
at times with an increase in employment, as in the monopsony model. 10 On 
the basis of these studies, it seems likely that the increase in the minimum 
wage of nearly 25 percent (from $7.25 to $9 an hour) currently envisaged by 
the Obama administration will have little or no effect on the number of jobs. 
Obviously, raising the minimum wage cannot continue indefinitely: as the 
minimum wage increases, the negative effects on the level of employment 
eventually win out. If the minimum wage were doubled or tripled, it would be 
surprising if the negative impact were not dominant. It is more difficult to 
justify a significant increase in the minimum wage in a country like France, 
where it is relatively high (compared with the average wage and marginal pro¬ 
ductivity), than in the United States. To increase the purchasing power of low- 
paid workers in France, it is better to use other tools, such as training to im¬ 
prove skills or tax reform (these two remedies are complementary, moreover). 
Nevertheless, the minimum wage should not be frozen. Wage increases can¬ 
not exceed productivity increases indefinitely, but it is just as unhealthy to 
restrain (most) wage increases to below the rate of productivity increase. Dif¬ 
ferent labor market institutions and policies play different roles, and each 
must be used in an appropriate manner. 

To sum up: the best way to increase wages and reduce wage inequalities in 
the long run is to invest in education and skills. Over the long run, minimum 
wages and wage schedules cannot multiply wages by factors of five or ten: to 
achieve that level of progress, education and technology are the decisive 
forces. Nevertheless, the rules of the labor market play a crucial role in wage 
setting during periods of time determined by the relative progress of educa¬ 
tion and technology. In practice, those periods can be fairly long, in part be¬ 
cause it is hard to gauge individual marginal productivities with any certainty, 
and in part because of the problem of specific investments and imperfect 
competition. 


313 


THE STRUCTURE OF INEQUALITY 


How to Explain the Explosion of Inequality in the United States? 

The most striking failure of the theory of marginal productivity and the race 
between education and technology is no doubt its inability to adequately ex¬ 
plain the explosion of very high incomes from labor observed in the United 
States since 1980. According to this theory, one should be able to explain this 
change as the result of skill-biased technological change. Some US econo¬ 
mists buy this argument, which holds that top labor incomes have risen much 
more rapidly than average wages simply because unique skills and new tech¬ 
nology have made these workers much more productive than the average. 
There is a certain tautological quality to this explanation (after all, one can 
“explain” any distortion of the wage hierarchy as the result of some supposed 
technological change). It also has other major weaknesses, which to my mind 
make it a rather unconvincing argument. 

First, as shown in the previous chapter, the increase in wage inequality in 
the United States is due mainly to increased pay at the very top end of the 
distribution: the top 1 percent and even more the top 0.1 percent. If we look at 
the entire top decile, we find that “the 9 percent” have progressed more rap¬ 
idly than the average worker but not nearly at the same rate as “the 1 percent.” 
Concretely, those making between $100,000 and $100,000 a year have seen 
their pay increase only slightly more rapidly than the average, whereas those 
making more than $500,000 a year have seen their remuneration literally ex¬ 
plode (and those above $1 million a year have risen even more rapidly). 11 This 
very sharp discontinuity at the top income levels is a problem for the theory of 
marginal productivity: when we look at the changes in the skill levels of dif¬ 
ferent groups in the income distribution, it is hard to see any discontinuity 
between “the 9 percent” and “the 1 percent,” regardless of what criteria we use: 
years of education, selectivity of educational institution, or professional expe¬ 
rience. One would expect a theory based on “objective” measures of skill and 
productivity to show relatively uniform pay increases within the top decile, or 
at any rate increases within different subgroups much closer to one another 
than the widely divergent increases we observe in practice. 

Make no mistake: I am not denying the decisive importance of the invest¬ 
ments in higher education and training that Katz and Goldin have identified. 
Policies to encourage broader access to universities are indispensable and cru¬ 
cial in the long run, in the United States and elsewhere. As desirable as such 


314 


INEQUALITY OF LABOR INCOME 


policies are, however, they seem to have had limited impact on the explosion 
of the topmost incomes observed in the United States since 1980. 

In short, two distinct phenomena have been at work in recent decades. 
First, the wage gap between college graduates and those who go no further 
than high school has increased, as Goldin and Katz showed. In addition, the 
top 1 percent (and even more the top 0.1 percent) have seen their remuneration 
take off. This is a very specific phenomenon, which occurs within the group of 
college graduates and in many cases separates individuals who have pursued 
their studies at elite universities for many years. Quantitatively, the second 
phenomenon is more important than the first. In particular, as shown in the 
previous chapter, the overperformance of the top centile explains most (nearly 
three-quarters) of the increase in the top decile’s share of US national income 
since 1970. 12 It is therefore important to find an adequate explanation of this 
phenomenon, and at first sight the educational factor does not seem to be the 
right one to focus on. 

The Rise of the Supermanager: An Anglo-Saxon Phenomenon 

The second difficulty—and no doubt the major problem confronting the 
marginal productivity theory—is that the explosion of very high salaries oc¬ 
curred in some developed countries but not others. This suggests that institu¬ 
tional differences between countries rather than general and a priori universal 
causes such as technological change played a central role. 

I begin with the English-speaking countries. Broadly speaking, the rise of 
the supermanager is largely an Anglo-Saxon phenomenon. Since 1980 the share 
of the upper centile in national income has risen significantly in the United 
States, Great Britain, Canada, and Australia (see Figure 9.2). Unfortunately, 
we do not have separate series for wage inequality and total income inequality 
for all countries as we do for France and the United States. But in most cases 
we do have data concerning the composition of income in relation to total 
income, from which we can infer that in all of these countries the explosion of 
top incomes explains most (generally at least two-thirds) of the increase in the 
top centile’s share of national income; the rest is explained by robust income 
from capital. In all the English-speaking countries, the primary reason for 
increased income inequality in recent decades is the rise of the supermanager 
in both the financial and nonfinancial sectors. 


315 


THE STRUCTURE OF INEQUALITY 



FIGURE 9.2. Income inequality in Anglo-Saxon countries, 1910-2010 

The share of top percentile in total income rose since the 1970s in all Anglo-Saxon 
countries, but with different magnitudes. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


This family resemblance should not be allowed to obscure the fact that 
the magnitude of the phenomenon varies widely from country to country, 
however. Figure 9.2 is quite clear on this point. In the 1970s, the upper cen- 
tile’s share of national income was quite similar across countries. It ranged 
from 6 to 8 percent in the four English-speaking countries considered, and 
the United States did not stand out as exceptional: indeed, Canada was slightly 
higher, at 9 percent, whereas Australia came in last, with just 5 percent of na¬ 
tional income going to the top centile in the late 1970s and early 1980s. Thirty 
years later, in the early 2010s, the situation is totally different. The upper cen- 
tile’s share is nearly 20 percent in the United States, compared with 14-15 
percent in Britain and Canada and barely 9-10 percent in Australia (see Fig¬ 
ure 9.2). 13 To a first approximation, we can say that the upper centile ’s share in 
the United States increased roughly twice as much as in Britain and Canada 
and about three times as much as in Australia and New Zealand. 14 If the rise 
of the supermanager were a purely technological phenomenon, it would be 
difficult to understand why such large differences exist between otherwise 
quite similar countries. 














































INEQUALITY OF LABOR INCOME 



figure 9.3. Income inequality in Continental Europe and Japan, 1910-1010 

As compared to Anglo-Saxon countries, the share of top percentile barely increased 
since the 1970s in Continental Europe and Japan. 

Sources and series: see piketty.pse.ens.fr/capitalnc. 


Let me turn now to the rest of the wealthy world, namely, continental Eu¬ 
rope and Japan. The key fact is that the upper centile’s share of national in¬ 
come in these countries has increased much less than in the English-speaking 
countries since 1980. The comparison between Figures 9.2 and 9.3 is particu¬ 
larly striking. To be sure, the upper centile’s share increased significantly ev¬ 
erywhere. In Japan the evolution was virtually the same as in France: the top 
centile’s share of national income was barely 7 percent in the 1980s but is 9 
percent or perhaps even slightly higher today. In Sweden, the top centile’s share 
was a little more than 4 percent in the early 1980s (the lowest level recorded in 
the World Top Incomes Database for any country in any period) but reached 
7 percent in the early 2010s. 15 In Germany, the top centile’s share rose from 
about 9 percent to nearly 11 percent of national income between the early 
1980s and the early 1010s (see Figure 9.3). 

If we look at other European countries, we observe similar evolutions, 
with the top centile’s share increasing by two or three points of national in¬ 
come over the past thirty years in both northern and southern Europe. In 
Denmark and other Nordic countries, top incomes claim a smaller share of 


317 








































THE STRUCTURE OF INEQUALITY 



FIGURE 9.4. Income inequality in Northern and Southern Europe, 1910-2010 
As compared to Anglo-Saxon countries, the top percentile income share barely increased 
in Northern and Southern Europe since the 1970s. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


the total, but the increase is similar: the top centile received a little more than 
5 percent of Danish national income in the 1980s but got close to 7 percent in 
1000 - 1010 . In Italy and Spain, the orders of magnitude are very close to those 
observed in France, with the top centile’s share rising from 7 to 9 percent of 
national income in the same period, again an increase of two points of na¬ 
tional income (see Figure 9.4). In this respect, continental Europe is indeed 
an almost perfect “union.” Britain, of course, stands apart, being much closer 
to the pattern of the United States than that of Europe. 16 

Make no mistake: these increases on the order of two to three points of 
national income in Japan and the countries of continental Europe mean that 
income inequality rose quite significantly. The top 1 percent of earners saw 
pay increases noticeably more rapid than the average: the upper centile’s share 
increased by about 30 percent, and even more in countries where it started out 
lower. This was quite striking to contemporary observers, who read in the daily 
paper or heard on the radio about stupendous raises for “supermanagers.” It 
was particularly striking in the period 1990-2010, when average income stag¬ 
nated, or at least rose much more slowly than in the past. 


318 













































Share of top 0.1% in total income 


INEQUALITY OF LABOR INCOME 



figure 9.5. The top decile income share in Anglo-Saxon countries, 1910-2010 
The share of the top 0.1 percent highest incomes in total income rose sharply since the 
1970s in all Anglo-Saxon countries, but with varying magnitudes. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


Furthermore, the higher one climbs in the income hierarchy, the more 
spectacular the raises. Even if the number of individuals benefiting from such 
salary increases is fairly limited, they are nevertheless quite visible, and this 
visibility naturally raises the question of what justifies such high levels of com¬ 
pensation. Consider the share of the top thousandth—the best remunerated 
0.1 percent—in the national income of the English-speaking countries on 
the one hand (Figure 9.5) and continental Europe and Japan on the other 
(Figure 9.6). The differences are obvious: the top thousandth in the United 
States increased their share from 2 to nearly 10 percent over the past several 
decades—an unprecedented rise. 17 But there has been a remarkable increase 
of top incomes everywhere. In France and Japan, the top thousandth’s share 
rose from barely 1.5 percent of national income in the early 1980s to nearly 2.5 
percent in the early 2010s—close to double. In Sweden, the same share rose 
from less than 1 percent to more than 2 percent in the same period. 

To make clear what this represents in concrete terms, remember that a 2 per¬ 
cent share of national income for 0.1 percent of the population means that the 
average individual in this group enjoys an income 20 times higher than the 


319 













































THE STRUCTURE OF INEQUALITY 



FIGURE 9.6. The top decile income share in Continental Europe and Japan, 
1910-2010 

As compared to Anglo-Saxon countries, the top 0.1 percent income share barely increased 
in Continental Europe and Japan. 

Sources and series: see piketty.pse.ens.fr/capital21c. 

national average (or 600,000 euros a year if the average income is 30,000 per 
adult). A share of 10 percent means that each individual enjoys an income 100 
times the national average (or 3 million euros a year if the average is 30,ooo). 18 
Recall, too, that the top 0.1 percent is by definition a group of 50,000 people in 
a country with a population of 50 million adults (like France in the early 2010s). 
This is a very small minority (“the 1 percent” is of course 10 times larger), yet it 
occupies a significant place in the social and political landscape . 19 The central 
fact is that in all the wealthy countries, including continental Europe and Ja¬ 
pan, the top thousandth enjoyed spectacular increases in purchasing power in 
1990-2010, while the average person’s purchasing power stagnated. 

From a macroeconomic point of view, however, the explosion of very high 
incomes has thus far been of limited importance in continental Europe and 
Japan: the rise has been impressive, to be sure, but too few people have been 
affected to have had an impact as powerful as in the United States. The trans¬ 
fer of income to “the 1 percent” involves only two to three points of national 
income in continental Europe and Japan compared with 10 to 15 points in the 
United States—5 to 7 times greater. 20 


320 














































INEQUALITY OF LABOR INCOME 


The simplest way to express these regional differences is no doubt the fol¬ 
lowing: in the United States, income inequality in 2000-2010 regained the 
record levels observed in 1910-1920 (although the composition of income was 
now different, with a larger role played by high incomes from labor and a 
smaller role by high incomes from capital). In Britain and Canada, things 
moved in the same direction. In continental Europe and Japan, income ine¬ 
quality today remains far lower than it was at the beginning of the twentieth 
century and in fact has not changed much since 1945, if we take a long-run 
view. The comparison of Figures 9.2 and 9.3 is particularly clear on this point. 

Obviously, this does not mean that the European and Japanese evolutions 
of the past few decades should be neglected. On the contrary: their trajectory 
resembles that of the United States in some respects, with a delay of one or 
two decades, and one need not wait until the phenomenon assumes the mac¬ 
roeconomic significance observed in the United States to worry about it. 

Nevertheless, the fact remains that the evolution in continental Europe 
and Japan is thus far much less serious than in the United States (and, to a 
lesser extent, in the other Anglo-Saxon countries). This may tell us something 
about the forces at work. The divergence between the various regions of the 
wealthy world is all the more striking because technological change has been 
the same more or less everywhere: in particular, the revolution in information 
technology has affected Japan, Germany, France, Sweden, and Denmark 
as much as the United States, Britain, and Canada. Similarly, economic 
growth—or, more precisely, growth in output per capita, which is to say, pro¬ 
ductivity growth—has been quite similar throughout the wealthy countries, 
with differences of a few tenths of a percentage point . 21 In view of these facts, 
this quite large divergence in the way the income distribution has evolved in 
the various wealthy countries demands an explanation, which the theory of 
marginal productivity and of the race between technology and education 
does not seem capable of providing. 

Europe: More Inegalitarian Than the New World in 1900 -1910 

Note, moreover, that the United States, contrary to what many people think 
today, was not always more inegalitarian than Europe—far from it. Income 
inequality was actually quite high in Europe at the beginning of the twenti¬ 
eth century. This is confirmed by all the indices and historical sources. In 


321 


THE STRUCTURE OF INEQUALITY 


particular, the top centile’s share of national income exceeded 20 percent in 
all the countries of Europe in 1900-1910 (see Figures 9.2-4). This was true 
not only of Britain, France, and Germany but also of Sweden and Denmark 
(proof that the Nordic countries have not always been models of equality— 
far from it), and more generally of all European countries for which we have 
estimates from this period . 22 

The similar levels of income concentration in all European countries dur¬ 
ing the Belle Epoque obviously demand an explanation. Since top incomes in 
this period consisted almost entirely of income from capital 23 the explana¬ 
tion must be sought primarily in the realm of concentration of capital. Why 
was capital so concentrated in Europe in the period 1900-1910? 

It is interesting to note that, compared with Europe, inequality was lower 
not only in the United States and Canada (where the top centile’s share of 
national income was roughly 16-18 percent at the beginning of the twentieth 
century) but especially in Australia and New Zealand (11-12 percent). Thus it 
was the New World, and especially the newest and most recently settled parts 
of the New World, that appear to have been less inegalitarian than Old Eu¬ 
rope in the Belle Epoque. 

It is also interesting to note that Japan, despite its social and cultural 
differences from Europe, seems to have had the same high level of inequal¬ 
ity at the beginning of the twentieth century, without about 20 percent of 
national income going to the top centile. The available data do not allow me 
to make all the comparisons I would like to make, but all signs are that in 
terms of both income structure and income inequality, Japan was indeed 
part of the same “old world” as Europe. It is also striking to note the similar 
evolution of Japan and Europe over the course of the twentieth century 
(Figure 9.3). 

I will return later to the reasons for the very high concentration of capital 
in the Belle Epoque and to the transformations that took place in various 
countries over the course of the twentieth century (namely, a reduction of 
concentration). I will show in particular that the greater inequality of wealth 
that we see in Europe and Japan is fairly naturally explained by the low demo¬ 
graphic growth rate we find in the Old World, which resulted almost auto¬ 
matically in a greater accumulation and concentration of capital. 

At this stage, I want simply to stress the magnitude of the changes that 
have altered the relative standing of countries and continents. The clearest 


322 


Share of top decile in total income 


INEQUALITY OF LABOR INCOME 



figure 9.7. The top decile income share in Europe and the United States, 1900-2010 

In the 1950S-1970S, the top decile income share was about 30-35 percent of total in¬ 
come in Europe as in the United States. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


way to make this point is probably to look at the evolution of the top decile’s 
share of national income. Figure 9.7 shows this for the United States and four 
European countries (Britain, France, Germany, and Sweden) since the turn of 
the twentieth century. I have indicated decennial averages in order to focus 
attention on long-term trends. 24 

What we find is that on the eve of World War I, the top decile’s share was 
45-50 percent of national income in all the European countries, compared 
with a little more than 40 percent in the United States. By the end of World 
War II, the United States had become slightly more inegalitarian than Eu¬ 
rope: the top decile’s share decreased on both continents owing to the shocks 
of 1914-1945, but the fall was more precipitous in Europe (and Japan). The 
explanation for this is that the shocks to capital were much larger. Between 
1950 and 1970, the upper decile’s share was fairly stable and fairly similar in 
the United States and Europe, around 30-35 percent of national income. The 
strong divergence that began in 1970-1980 led to the following situation in 
2000-2010: the top decile’s share of US national income reached 45-50 per¬ 
cent, or roughly the same level as Europe in 1900-1910. In Europe, we see 


323 






































Share of top decile in total i 


THE STRUCTURE OF INEQUALITY 



FIGURE 9.8. Income inequality in Europe versus the United States, 1900-2010 

The top decile income share was higher in Europe than in the United States in 
1900-1910; it is a lot higher in the United States in 2000-2010. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


wide variation, from the most inegalitarian case (Britain, with a top decile 
share of 40 percent) to the most egalitarian (Sweden, less than 30 percent), 
with France and Germany in between (around 35 percent). 

If we calculate (somewhat abusively) an average for Europe based on 
these four countries, we can make a very clear international comparison: the 
United States was less inegalitarian than Europe in 1900-1910, slightly more 
inegalitarian in 1950-1960, and much more inegalitarian in 2000-2010 (see 
Figure 9-8). 25 

Apart from this long-term picture, there are of course multiple national 
histories as well as constant short- and medium-term fluctuations linked to 
social and political developments in each country, as I showed in Chapter 8 
and analyzed in some detail in the French and US cases. Space will not permit 
me to do the same for every country here. 26 

In passing, however, it is worth mentioning that the period between the 
two world wars seems to have been particularly tumultuous and chaotic al¬ 
most everywhere, though the chronology of events varied from country to 
country. In Germany, the hyperinflation of the 1920s followed hard on the 


324 
































INEQUALITY OF LABOR INCOME 


heels of military defeat. The Nazis came to power a short while later, after the 
worldwide depression had plunged the country back into crisis. Interestingly, 
the top centile’s share of German national income increased rapidly between 
1933 and 1938, totally out of phase with other countries: this reflects the re¬ 
vival of industrial profits (boosted by demand for armaments), as well as a 
general reestablishment of income hierarchies in the Nazi era. Note, too, that 
the share of the top centile—and, even more, the top thousandth—in Ger¬ 
many has been noticeably higher since 1950 than in most other continental 
European countries (including, in particular, France) as well as Japan, even 
though the overall level of inequality in Germany is not very different. This 
can be explained in various ways, among which it is difficult to say that one is 
better than another. (I will come back to this point.) 

In addition, there are serious lacunae in German tax records, owing in 
large part to the country’s turbulent history in the twentieth century, so 
that it is difficult to be sure about certain developments or to make sharp 
comparisons with other countries. Prussia, Saxony, and most other German 
states imposed an income tax relatively early, between 1880 and 1890, but 
there were no national laws or tax records until after World War I. There 
were frequent breaks in the statistical record during the 1920s, and then the 
records for 1938 to 1930 are missing altogether, so it is impossible to study 
how the income distribution evolved during World War II and its immedi¬ 
ate aftermath. 

This distinguishes Germany from other countries deeply involved in the 
conflict, especially Japan and France, whose tax administrations continued to 
compile statistics during the war years without interruption, as if nothing 
were amiss. If Germany was anything like these two countries, it is likely that 
the top centile’s share of national income reached a nadir in 1945 (the year in 
which German capital and income from capital were reduced to virtually 
nothing) before beginning to rise sharply again in 1946-1947. Yet when Ger¬ 
man tax records return in 1930, they show the income hierarchy already be¬ 
ginning to resemble its appearance in 1938. In the absence of complete sources, 
it is difficult to say more. The German case is further complicated by the fact 
that the country’s boundaries changed several times during the twentieth cen¬ 
tury, most recently with the reunification of 1990-1991, in addition to which 
full tax data are published only every three years (rather than annually as in 
most other countries). 


325 


THE STRUCTURE OF INEQUALITY 


Inequalities in Emerging Economies: Lower Than 
in the United States? 

Let me turn now to the poor and emerging economies. The historical sources 
we need in order to study the long-run dynamics of the wealth distribution 
there are unfortunately harder to come by than in the rich countries. There 
are, however, a number of poor and emerging economies for which it is possi¬ 
ble to find long series of tax data useful for making (rough) comparisons with 
our results for the more developed economies. Shortly after Britain intro¬ 
duced a progressive income tax at home, it decided to do the same in a num¬ 
ber of its colonies. Thus an income tax fairly similar to that introduced in 
Britain in 1909 was adopted in South Africa in 1913 and in India (including 
present-day Pakistan) in 1922. Similarly, the Netherlands imposed an income 
tax on its Indonesian colony in 1920. Several South American countries intro¬ 
duced an income tax between the two world wars: Argentina, for example, 
did so in 1932. For these four countries—South Africa, India, Indonesia, and 
Argentina—we have tax data going back, respectively, to 1913,1922,1920, and 
1932 and continuing (with gaps) to the present. The data are similar to what 
we have for the rich countries and can be employed using similar methods, in 
particular national income estimates for each country going back to the turn 
of the twentieth century. 

My estimates are indicated in Figure 9.9. Several points deserve to be em¬ 
phasized. First, the most striking result is probably that the upper centile’s 
share of national income in poor and emerging economies is roughly the same 
as in the rich economies. During the most inegalitarian phases, especially 
1910-1950, the top centile took around 20 percent of national income in all 
four countries: 15-18 percent in India and 22-25 percent in South Africa, In¬ 
donesia, and Argentina. During more egalitarian phases (essentially 1950- 
1980), the top centile’s share fell to between 6 and 12 percent (barely 5-6 per¬ 
cent in India, 8-9 percent in Indonesia and Argentina, and 11-12 percent in 
South Africa). Thereafter, in the 1980s, the top centile’s share rebounded, and 
today it stands at about 15 percent of national income (12-13 percent in India 
and Indonesia and 16-18 percent in South Africa and Argentina). 

Figure 9.9 also shows two countries for which the available tax records al¬ 
low us only to study how things have changed since the mid-1980s: China and 
Colombia. 27 In China, the top centile’s share of national income rose rapidly 


326 


INEQUALITY OF LABOR INCOME 



figure 9.9. Income inequality in emerging countries, 1910-2010 

Measured by the top percentile income share, income inequality rose in emerging 

countries since the 1980s, but ranks below the US level in 2000-2010. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


over the past several decades but starting from a fairly low (almost Scandina¬ 
vian) level in the mid-1980s: less than 5 percent of national income went to the 
top centile at that time, according to the available sources. This is not very 
surprising for a Communist country with a very compressed wage schedule 
and virtual absence of private capital. Chinese inequality increased very rap¬ 
idly following the liberalization of the economy in the 1980s and accelerated 
growth in the period 1990-2000, but according to my estimates, the upper 
centile’s share in 2000-2010 was 10-11 percent, less than in India or Indone¬ 
sia (12-14 percent, roughly the same as Britain and Canada) and much lower 
than in South Africa or Argentina (16-18 percent, approximately the same 
as the United States). 

Colombia on the other hand is one of the most inegalitarian societies in 
the WTID: the top centile’s share stood at about 20 percent of national in¬ 
come throughout the period 1990-2010, with no clear trend (see Figure 9.9). 
This level of inequality is even higher than that attained by the United States 
in 2000-2010, at least if capital gains are excluded; if they are included, the 
United States was slightly ahead of Colombia over the past decade. 


327 


















































THE STRUCTURE OF INEQUALITY 


It is important, however, to be aware of the significant limitations of the 
data available for measuring the dynamics of the income distribution in poor 
and emerging countries and for comparing them with the rich countries. The 
orders of magnitude indicated here are the best I was able to come up with 
given the available sources, but the truth is that our knowledge remains mea¬ 
ger. We have tax data for the entire twentieth century for only a few emerging 
economies, and there are many gaps and breaks in the data, often in the pe¬ 
riod 1950-1970, the era of independence (in Indonesia, for example). Work is 
going forward to update the WTID with historical data from many other 
countries, especially from among the former British and French colonies, in 
Indochina and Africa, but data from the colonial era are often difficult to re¬ 
late to contemporary tax records. 28 

Where tax records do exist, their interest is often reduced by the fact that 
the income tax in less developed countries generally applies to only a small 
minority of the population, so that one can estimate the upper centile’s share 
of total income but not the upper decile’s. Where the data allow, as in South 
Africa for certain subperiods, one finds that the highest observed levels for 
the top decile are on the order of 50-55 percent of national income—a level 
comparable to or slightly higher than the highest levels of inequality observed 
in the wealthy countries, in Europe in 1900-1910 and in the United States in 
2000-2010. 

I have also noticed a certain deterioration of the tax data after 1990. This is 
due in part to the arrival of computerized records, which in many cases led 
the tax authorities to interrupt the publication of detailed statistics, which in 
earlier periods they needed for their own purposes. This sometimes means, 
paradoxically, that sources have deteriorated since the advent of the informa¬ 
tion age (we find the same thing happening in the rich countries). 29 Above all, 
the deterioration of the sources seems to be related to a certain disaffection 
with the progressive income tax in general on the part of certain governments 
and international organizations. 30 A case in point is India, which ceased pub¬ 
lishing detailed income tax data in the early 2000s, even though such data 
had been published without interruption since 1922. As a result, it is harder to 
study the evolution of top incomes in India since 2000 than over the course of 
the twentieth century. 31 

This lack of information and democratic transparency is all the more re¬ 
grettable in that the question of the distribution of wealth and of the fruits of 


328 


INEQUALITY OF LABOR INCOME 


growth is at least as urgent in the poor and emerging economies as in the rich 
ones. Note, too, that the very high official growth figures for developing 
countries (especially India and China) over the past few decades are based al¬ 
most exclusively on production statistics. If one tries to measure income 
growth by using household survey data, it is often quite difficult to identify 
the reported rates of macroeconomic growth: Indian and Chinese incomes 
are certainly increasing rapidly, but not as rapidly as one would infer from of¬ 
ficial growth statistics. This paradox—sometimes referred to as the “black 
hole” of growth—is obviously problematic. It may be due to the overestima¬ 
tion of growth of output (there are many bureaucratic incentives for doing so), 
or perhaps the underestimation of income growth (household surveys have 
their own flaws), or most likely both. In particular, the missing income may 
be explained by the possibility that a disproportionate share of the growth in 
output has gone to the most highly remunerated individuals, whose incomes 
are not always captured in the tax data. 

In the case of India, it is possible to estimate (using tax return data) that 
the increase in the upper centile’s share of national income explains between 
one-quarter and one-third of the “black hole” of growth between 1990 and 
2000. 32 Given the deterioration of the tax data since 2000, it is impossible to 
do a proper social decomposition of recent growth. In the case of China, offi¬ 
cial tax records are even more rudimentary than in India. In the current state 
of research, the estimates in Figure 9.9 are the most reliable we have. 33 It is 
nevertheless urgent that both countries publish more complete data—and 
other countries should do so as well. If and when better data become avail¬ 
able, we may discover that inequality in India and China has increased more 
rapidly than we imagined. 

In any case, the important point is that whatever flaws the tax authorities 
in poor and emerging countries may exhibit, the tax data reveal much higher— 
and more realistic—top income levels than do household surveys. For exam¬ 
ple, tax returns show that the top centile’s share of national income in Colom¬ 
bia in 2000-2010 was more than 20 percent (and almost 20 percent in 
Argentina). Actual inequality may be even greater. But the fact that the high¬ 
est incomes declared in household surveys in these same countries are gener¬ 
ally only 4 to 5 times as high as the average income (suggesting that no one is 
really rich)—so that, if we were to trust the household survey, the top centile’s 
share would be less than 5 percent—suggests that the survey data are not very 


329 


THE STRUCTURE OF INEQUALITY 


credible. Clearly, household surveys, which are often the only source used by 
international organizations (in particular the World Bank) and governments 
for gauging inequality, give a biased and misleadingly complacent view of the 
distribution of wealth. As long as these official estimates of inequality fail to 
combine survey data with other data systematically gleaned from tax records 
and other government sources, it will be impossible to apportion macroeco¬ 
nomic growth properly among various social groups or among the centiles 
and deciles of the income hierarchy. This is true, moreover, of wealthy coun¬ 
tries as well as poor and emerging ones. 

The Illusion of Marginal Productivity 

Let me now return to the explosion of wage inequality in the United States 
(and to a lesser extent Britain and Canada) after 1970. As noted, the theory of 
marginal productivity and of the race between technology and education is 
not very convincing: the explosion of compensation has been highly concen¬ 
trated in the top centile (or even the top thousandth) of the wage distribution 
and has affected some countries while sparing others (Japan and continental 
Europe are thus far much less affected than the United States), even though 
one would expect technological change to have altered the whole top end of 
the skill distribution in a more continuous way and to have worked its effects 
in all countries at a similar level of development. The fact that income ine¬ 
quality in the United States in 2000-2010 attained a level higher than that 
observed in the poor and emerging countries at various times in the past—for 
example, higher than in India or South Africa in 1920-1930,1960-1970, and 
2000-2010—also casts doubt on any explanation based solely on objective 
inequalities of productivity. Is it really the case that inequality of individual 
skills and productivities is greater in the United States today than in the half¬ 
illiterate India of the recent past (or even today) or in apartheid (or postapart¬ 
heid) South Africa? If that were the case, it would be bad news for US edu¬ 
cational institutions, which surely need to be improved and made more 
accessible but probably do not deserve such extravagant blame. 

To my mind, the most convincing explanation for the explosion of the 
very top US incomes is the following. As noted, the vast majority of top earn¬ 
ers are senior managers of large firms. It is rather naive to seek an objective 
basis for their high salaries in individual “productivity.” When a job is repli- 


330 


INEQUALITY OF LABOR INCOME 


cable, as in the case of an assembly-line worker or fast-food server, we can give 
an approximate estimate of the “marginal product” that would be realized 
by adding one additional worker or waiter (albeit with a considerable margin 
of error in our estimate). But when an individual’s job functions are unique, 
or nearly so, then the margin of error is much greater. Indeed, once we intro¬ 
duce the hypothesis of imperfect information into standard economic models 
(eminently justifiable in this context), the very notion of “individual marginal 
productivity” becomes hard to define. In fact, it becomes something close to a 
pure ideological construct on the basis of which a justification for higher sta¬ 
tus can be elaborated. 

To put this discussion in more concrete terms, imagine a large multina¬ 
tional corporation employing 100,000 people and with gross annual revenue 
of 10 billion euros, or 100,000 euros per worker. Suppose that half of this 
revenue figure represents purchases of goods and services by the firm (this is 
a typical figure for the economy as a whole), so that the value added by the 
firm—the value available to pay the labor and capital that it directly em¬ 
ploys—is 5 billion euros, or 50,000 euros per worker. To set the pay of the firm’s 
CFO (or his deputies, or of the director of marketing and her staff, etc.), one 
would in principle want to estimate his marginal productivity, that is, his 
contribution to the firm’s value-added of 5 billion euros: is it 100,000, 500,000, 
or 5 million euros per year? A precise, objective answer to this question is 
clearly impossible. To be sure, one could in theory experiment by trying out 
several CFOs, each for several years, in order to determine what impact the 
choice has on the firm’s total revenue of 10 billion euros. Obviously, such an 
estimate would be highly approximate, with a margin of error much greater 
than the maximum salary one would think of paying, even in a totally stable 
economic environment. 34 And the whole idea of experimentation looks even 
more hopeless when one remembers that the environment is in fact changing 
constantly, as is the nature of the firm and the exact definition of each job. 

In view of these informational and cognitive difficulties, how are such re¬ 
munerations determined in practice? They are generally set by hierarchical 
superiors, and at the very highest levels salaries are set by the executives them¬ 
selves or by corporate compensation committees whose members usually earn 
comparable salaries (such as senior executives of other large corporations). 
In some companies, stockholders are asked to vote on compensation for se¬ 
nior executives at annual meetings, but the number of posts subject to such 


331 


THE STRUCTURE OF INEQUALITY 


approval is small, and not all senior managers are covered. Since it is impossi¬ 
ble to give a precise estimate of each manager’s contribution to the firm’s out¬ 
put, it is inevitable that this process yields decisions that are largely arbitrary 
and dependent on hierarchical relationships and on the relative bargaining 
power of the individuals involved. It is only reasonable to assume that people 
in a position to set their own salaries have a natural incentive to treat them¬ 
selves generously, or at the very least to be rather optimistic in gauging their 
marginal productivity. To behave in this way is only human, especially since 
the necessary information is, in objective terms, highly imperfect. It may be 
excessive to accuse senior executives of having their “hands in the till,” but 
the metaphor is probably more apt than Adam Smith’s metaphor of the mar¬ 
ket’s “invisible hand.” In practice, the invisible hand does not exist, any more 
than “pure and perfect” competition does, and the market is always embod¬ 
ied in specific institutions such as corporate hierarchies and compensation 
committees. 

This does not mean that senior executives and compensation committees 
can set whatever salaries they please and always choose the highest possible 
figure. “Corporate governance” is subject to certain institutions and rules 
specific to each country. The rules are generally ambiguous and flawed, but 
there are certain checks and balances. Each society also imposes certain social 
norms, which affect the views of senior managers and stockholders (or their 
proxies, who are often institutional investors such as financial corporations 
and pension funds) as well as of the larger society. These social norms reflect 
beliefs about the contributions that different individuals make to the firm’s 
output and to economic growth in general. Since uncertainty about these is¬ 
sues is great, it is hardly surprising that perceptions vary from country to 
country and period to period and are influenced by each country’s specific 
history. The important point is that it is very difficult for any individual firm 
to go against the prevailing social norms of the country in which it operates. 

Without a theory of this kind, it seems to me quite difficult to explain the 
very large differences of executive pay that we observe between on the one 
hand the United States (and to a lesser extent in other English-speaking coun¬ 
tries) and on the other continental Europe and Japan. Simply put, wage in¬ 
equalities increased rapidly in the United States and Britain because US and 
British corporations became much more tolerant of extremely generous pay 
packages after 1970. Social norms evolved in a similar direction in European 


332 


INEQUALITY OF LABOR INCOME 


and Japanese firms, but the change came later (in the 1980s or 1990s) and has 
thus far not gone as far as in the United States. Executive compensation of 
several million euros a year is still more shocking today in Sweden, Germany, 
France, Japan, and Italy than in the United States or Britain. It has not always 
been this way—far from it: recall that in the 1950s and 1960s the United 
States was more egalitarian than France, especially in regard to the wage hier¬ 
archy. But it has been this way since 1980, and all signs are that this change in 
senior management compensation has played a key role in the evolution of 
wage inequalities around the world. 

The Takeoff of the Supermanagers: 

A Powerful Forcefor Divergence 

This approach to executive compensation in terms of social norms and ac¬ 
ceptability seems rather plausible a priori, but in fact it only shifts the diffi¬ 
culty to another level. The problem is now to explain where these social norms 
come from and how they evolve, which is obviously a question for sociology, 
psychology, cultural and political history, and the study of beliefs and percep¬ 
tions at least as much as for economics per se. The problem of inequality is a 
problem for the social sciences in general, not for just one of its disciplines. In 
the case in point, I noted earlier that the “conservative revolution” that gripped 
the United States and Great Britain in the 1970s and 1980s, and that led to, 
among other things, greater tolerance of very high executive pay, was probably 
due in part to a feeling that these countries were being overtaken by others 
(even though the postwar period of high growth in Europe and Japan was in 
reality an almost mechanical consequence of the shocks of the period 1914- 
1945). Obviously, however, other factors also played an important role. 

To be clear, I am not claiming that all wage inequality is determined by 
social norms of fair remuneration. As noted, the theory of marginal produc¬ 
tivity and of the race between technology and education offers a plausible ex¬ 
planation of the long-run evolution of the wage distribution, at least up to a 
certain level of pay and within a certain degree of precision. Technology and 
skills set limits within which most wages must be fixed. But to the extent 
that certain job functions, especially in the upper management of large firms, 
become more difficult to replicate, the margin of error in estimating the 
productivity of any given job becomes larger. The explanatory power of the 


333 


THE STRUCTURE OF INEQUALITY 


skills-technology logic then diminishes, and that of social norms increases. 
Only a small minority of employees are affected, a few percent at most and 
probably less than i percent, depending on the country and period. 

But the key fact, which was by no means evident a priori, is that the top 
centile’s share of total wages can vary considerably by country and period, as 
the disparate evolutions in the wealthy countries after 1980 demonstrate. The 
explosion of supermanager salaries should of course be seen in relation to firm 
size and to the growing diversity of functions within the firm. But the objec¬ 
tively complex problem of governance of large organizations is not the only 
issue. It is also possible that the explosion of top incomes can be explained as 
a form of “meritocratic extremism,” by which I mean the apparent need of 
modern societies, and especially US society, to designate certain individuals 
as “winners” and to reward them all the more generously if they seem to have 
been selected on the basis of their intrinsic merits rather than birth or back¬ 
ground. (I will come back to this point.) 

In any case, the extremely generous rewards meted out to top managers 
can be a powerful force for divergence of the wealth distribution: if the best 
paid individuals set their own salaries, (at least to some extent), the result may 
be greater and greater inequality. It is very difficult to say in advance where 
such a process might end. Consider again the case of the CFO of a large firm 
with gross revenue of 10 billion euros a year. It is hard to imagine that the cor¬ 
porate compensation committee would suddenly decide that the CFO’s mar¬ 
ginal productivity is 1 billion or even 100 million euros (if only because it would 
then be difficult to find enough money to pay the rest of the management 
team). By contrast, some people might think that a pay package of 1 million, 
10 million, or even 50 million euros a year would be justified (uncertainty 
about individual marginal productivity being so large that no obvious limit is 
apparent). It is perfectly possible to imagine that the top centile’s share of to¬ 
tal wages could reach 15-10 percent in the United States, or 25-30 percent, or 
even higher. 

The most convincing proof of the failure of corporate governance and of 
the absence of a rational productivity justification for extremely high execu¬ 
tive pay is that when we collect data about individual firms (which we can do 
for publicly owned corporations in all the rich countries), it is very difficult to 
explain the observed variations in terms of firm performance. If we look at 
various performance indicators, such as sales growth, profits, and so on, we 


334 


INEQUALITY OF LABOR INCOME 


can break down the observed variance as a sum of other variances: variance 
due to causes external to the firm (such as the general state of the economy, 
raw material price shocks, variations in the exchange rate, average performance 
of other firms in the same sector, etc.) plus other “nonexternal” variances. 
Only the latter can be significantly affected by the decisions of the firm’s man¬ 
agers. If executive pay were determined by marginal productivity, one would 
expect its variance to have little to do with external variances and to depend 
solely or primarily on nonexternal variances. In fact, we observe just the op¬ 
posite: it is when sales and profits increase for external reasons that executive 
pay rises most rapidly. This is particularly clear in the case of US corporations: 
Bertrand and Mullainhatan refer to this phenomenon as “pay for luck.” 35 

I return to this question and generalize this approach in Part Four (see 
Chapter 14). The propensity to “pay for luck” varies widely with country and 
period, and notably as a function of changes in tax laws, especially the top 
marginal income tax rate, which seems to serve either as a protective barrier 
(when it is high) or an incentive to mischief (when it is low)—at least up to a 
certain point. Of course changes in tax laws are themselves linked to changes 
in social norms pertaining to inequality, but once set in motion they proceed 
according to a logic of their own. Specifically, the very large decrease in the top 
marginal income tax rate in the English-speaking countries after 1980 (de¬ 
spite the fact that Britain and the United States had pioneered nearly confis¬ 
catory taxes on incomes deemed to be indecent in earlier decades) seems to 
have totally transformed the way top executive pay is set, since top executives 
now had much stronger incentives than in the past to seek large raises. I also 
analyze the way this amplifying mechanism can give rise to another force for 
divergence that is more political in nature: the decrease in the top marginal 
income tax rate led to an explosion of very high incomes, which then increased 
the political influence of the beneficiaries of the change in the tax laws, who 
had an interest in keeping top tax rates low or even decreasing them further 
and who could use their windfall to finance political parties, pressure groups, 
and think tanks. 


335 


{ ten } 


Inequality of Capital Ownership 


Let me turn now to the question of inequality of wealth and its historical 
evolution. The question is important, all the more so because the reduction of 
this type of inequality, and of the income derived from it, was the only reason 
why total income inequality diminished during the first half of the twentieth 
century. As noted, inequality of income from labor did not decrease in a 
structural sense between 1900-1910 and 1950-1960 in either France or the 
United States (contrary to the optimistic predictions of Kuznets’s theory, 
which was based on the idea of a gradual and mechanical shift of labor from 
worse paid to better paid types of work), and the sharp drop in total income 
inequality was due essentially to the collapse of high incomes from capital. 
All the information at our disposal indicates that the same is true for all the 
other developed countries . 1 It is therefore essential to understand how and 
why this historic compression of inequality of wealth came about. 

The question is all the more important because capital ownership is ap¬ 
parently becoming increasingly concentrated once again today, as the capital/ 
income ratio rises and growth slows. The possibility of a widening wealth gap 
raises many questions as to its long-term consequences. In some respects it is 
even more worrisome than the widening income gap between supermanagers 
and others, which to date remains a geographically limited phenomenon. 

Hyperconcentrated Wealth: Europe and America 

As noted in Chapter 7, the distribution of wealth—and therefore of income 
from capital—is always much more concentrated than the distribution of in¬ 
come from labor. In all known societies, at all times, the least wealthy half of 
the population own virtually nothing (generally little more than 5 percent 
of total wealth); the top decile of the wealth hierarchy own a clear majority of 
what there is to own (generally more than 60 percent of total wealth and 
sometimes as much as 90 percent); and the remainder of the population (by 


336 


INEQUALITY OF CAPITAL OWNERSHIP 


construction, the 40 percent in the middle) own from 5 to 35 percent of all 
wealth. 2 1 also noted the emergence of a “patrimonial middle class,” that is, an 
intermediate group who are distinctly wealthier than the poorer half of the 
population and own between a quarter and a third of national wealth. The 
emergence of this middle class is no doubt the most important structural 
transformation to affect the wealth distribution over the long run. 

Why did this transformation occur? To answer this question, one must 
first take a closer look at the chronology. When and how did inequality of 
wealth begin to decline? To be candid, because the necessary sources (mainly 
probate records) are unfortunately not always available, I have thus far not 
been able to study the historical evolution of wealth inequality in as many 
countries as I examined in the case of income inequality. We have fairly com¬ 
plete historical estimates for four countries: France, Britain, the United States, 
and Sweden. The lessons of these four histories are fairly clear and consistent, 
however, so that we can say something about the similarities and differences 
between the European and US trajectories. 3 Furthermore, the wealth data 
have one enormous advantage over the income data: they allow us in some 
cases to go much farther back in time. Let me now examine one by one the 
four countries I have studied in detail. 

France: An Observatory of Private Wealth 

France is a particularly interesting case, because it is the only country for 
which we have a truly homogeneous historical source that allows us to study 
the distribution of wealth continuously from the late eighteenth century to 
the present. In 1791, shortly after the fiscal privileges of the nobility were abol¬ 
ished, a tax on estates and gifts was established, together with a wealth regis¬ 
try. These were astonishing innovations at the time, notable for their univer¬ 
sal scope. The new estate tax was universal in three ways: first, it applied to all 
types of property: farmland, other urban and rural real estate, cash, public 
and private bonds, other kinds of financial assets such as shares of stock or 
partnerships, furniture, valuables, and so on; second, it applied to all owners 
of wealth, whether noble or common; and third, it applied to fortunes of all 
sizes, large or small. Moreover, the purpose of this fundamental reform was 
not only to fill the coffers of the new regime but also to enable the government 
to record all transfers of wealth, whether by bequest (at the owner’s death) or 


337 


THE STRUCTURE OF INEQUALITY 


gift (during the owner’s lifetime), in order to guarantee to all the full exercise 
of their property rights. In official language, the estate and gift tax has 
always—from 1791 until now—been classified as one of a number of droits 
d’enregistrement (recording fees), and more specifically droits de mutation 
(transfer fees), which included both charges assessed on “free-will transfers,” 
or transfers of title to property made without financial consideration, by bequest 
or gift, and “transfers for consideration” (that is, transfers made in exchange 
for cash or other valuable tokens). The purpose of the law was thus to allow 
every property owner, large or small, to record his title and thus to enjoy his 
property rights in full security, including the right to appeal to the public au¬ 
thorities in case of difficulty. Thus a fairly complete system of property rec¬ 
ords was established in the late 1790s and early 1800s, including a cadastre for 
real estate that still exists today. 

In Part Four I say more about the history of estate taxes in different 
countries. At this stage, taxes are of interest primarily as a historical source. 
In most other countries, it was not until the end of the nineteenth century or 
beginning of the twentieth that estate and gift taxes comparable to France’s 
were established. In Britain, the reform of 1894 unified previous taxes on the 
conveyance of real estate, financial assets, and personal estate, but homoge¬ 
neous probate statistics covering all types of property go back only to 
1919-1920. In the United States, the federal tax on estates and gifts was not 
created until 1916 and covered only a tiny minority of the population. (Al¬ 
though taxes covering broader segments of the population do exist in some 
states, these are highly heterogeneous.) Ffence it is very difficult to study the 
evolution of wealth inequalities in these two countries before World War I. 
To be sure, there are many probate documents and estate inventories, mostly 
of private origin, dealing with particular subsets of the population and types 
of property, but there is no obvious way to use these records to draw general 
conclusions. 

This is unfortunate, because World War I was a major shock to wealth 
and its distribution. One of the primary reasons for studying the French case 
is precisely that it will allow us to place this crucial turning point in a longer 
historical perspective. From 1791 to 1901, the estate and gift tax was strictly 
proportional: it varied with degree of kinship but was the same regardless of 
the amount transferred and was usually quite low (generally 1-2 percent). The 
tax was made slightly progressive in 1901 after a lengthy parliamentary battle. 


338 


INEQUALITY OF CAPITAL OWNERSHIP 


The government, which had begun publishing detailed statistics on the an¬ 
nual flow of bequests and donations as far back as the 1820s, began compiling 
a variety of statistics by size of estate in 1901, and from then until the 1950s, 
these became increasingly sophisticated (with cross-tabulations by age, size of 
estate, type of property, etc.). After 1970, digital files containing representa¬ 
tive samples from estate and gift tax filings in a specific year became available, 
so that the data set can be extended to 2000-2010. In addition to the rich 
sources produced directly by the tax authorities over the past two centuries, I 
have also collected, together with Postel-Vinay and Rosenthal, tens of thousands 
of individual declarations (which have been very carefully preserved in na¬ 
tional and departmental archives since the early nineteenth century) for the 
purpose of constructing large samples covering each decade from 1800-1810 
to 2000-2010. All in all, French probate records offer an exceptionally rich 
and detailed view of two centuries of wealth accumulation and distribution . 4 

The Metamorphoses of a Patrimonial Society 

Figure 10.1 presents the main results I obtained for the evolution of the wealth 
distribution from 1810 to 2010. 5 The first conclusion is that prior to the shocks 
of 1914-1945, there was no visible trend toward reduced inequality of capital 
ownership. Indeed, there was a slight tendency for capital concentration to 
rise throughout the nineteenth century (starting from an already very high 
level) and even an acceleration of the inegalitarian spiral in the period 1880- 
1913. The top decile of the wealth hierarchy already owned between 80 and 85 
percent of all wealth at the beginning of the nineteenth century; by the turn 
of the twentieth, it owned nearly 90 percent. The top centile alone owned 45- 
50 percent of the nation’s wealth in 1800-1810; its share surpassed 50 percent 
in 1850-1860 and reached 60 percent in 1900-1910. 6 

Looking at these data with the historical distance we enjoy today, we can¬ 
not help being struck by the impressive concentration of wealth in France 
during the Belle Epoque, notwithstanding the reassuring rhetoric of the 
Third Republic’s economic and political elites. In Paris, which was home to 
little more than one-twentieth of the population in 1900-1910 but claimed 
one-quarter of the wealth, the concentration of wealth was greater still 
and seems to have increased without limit during the decades leading up to 
World War I. In the capital, where in the nineteenth century two-thirds of 


339 


Share of top decile or percentile in total wealth 


THE STRUCTURE OF INEQUALITY 



FIGURE io.i. Wealth inequality in France, 1810-2010 

The top decile (the top 10 percent highest wealth holders) owns 80-90 percent of total 
wealth in 1810-1910, and 60-65 percent today. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


the population died without any wealth to leave to the next generation (com¬ 
pared with half of the population in the rest of the country) but where the 
largest fortunes were also concentrated, the top centile’s share was about 55 
percent at the beginning of the century, rose to 60 percent in 1880-1890, and 
then to 70 percent on the eve of World War I (see Figure 10.2). Looking at this 
curve, it is natural to ask how high the concentration of wealth might have 
gone had there been no war. 

The probate records also allow us to see that throughout the nineteenth 
century, wealth was almost as unequally distributed within each age cohort as 
in the nation as a whole. Note that the estimates indicated in Figures 10.1-2 
(and subsequent figures) reflect inequality of wealth in the (living) adult pop¬ 
ulation at each charted date: we start with wealth at the time of death but re¬ 
weight each observation as a function of the number of living individuals in 
each age cohort as of the date in question. In practice, this does not make 
much difference: the concentration of wealth among the living is barely a few 
points higher than inequality of wealth at death, and the temporal evolution 
is nearly identical in each case. 7 


340 







































INEQUALITY OF CAPITAL OWNERSHIP 



figure 10.2. Wealth inequality in Paris versus France, 1810-2010 

The top percentile (the top 1 percent wealth holders) owns 70 percent of aggregate 

wealth in Paris on the eve ofWorld War I. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


How concentrated was wealth in France during the eighteenth century up 
to the eve of the Revolution? Without a source comparable to the probate rec¬ 
ords created by the revolutionary assemblies (for the Ancien Regime we have 
only heterogeneous and incomplete sets of private data, as for Britain and the 
United States until the late nineteenth century), it is unfortunately impossi¬ 
ble to make precise comparisons. Yet all signs are that inequality of private 
wealth decreased slightly between 1780 and 1810 owing to redistribution of 
agricultural land and cancellation of public debt during the Revolution, to¬ 
gether with other shocks to aristocratic fortunes. It is possible that the top 
decile’s share attained or even slightly exceeded 90 percent of total wealth on 
the eve of 1789 and that the upper centile’s share attained or exceeded 60 per¬ 
cent. Conversely, the “emigre billion” (the billion francs paid to the nobility 
in compensation for land confiscated during the Revolution) and the return 
of the nobility to the forefront of the political scene contributed to the recon¬ 
stitution of some old fortunes during the period of limited-suffrage monarchy 
(1815-1848). In fact, our probate data reveal that the percentage of aristocratic 
names in the top centile of the Parisian wealth hierarchy increased gradually 


341 


































THE STRUCTURE OF INEQUALITY 


from barely 15 percent in 1800-1810 to nearly 30 percent in 1840-1850 before 
embarking on an inexorable decline from 1850-1860 on, falling to less than 10 
percent by 1890-1900. 8 

The magnitude of the changes initiated by the French Revolution should 
not be overstated, however. Beyond the probable decrease of inequality of 
wealth between 1780 and 1810, followed by a gradual increase between 1810 
and 1910, and especially after 1870, the most significant fact is that inequality 
of capital ownership remained relatively stable at an extremely high level 
throughout the eighteenth and nineteenth centuries. During this period, 
the top decile consistently owned 80 to 90 percent of total wealth and the 
top centile 50 to 60 percent. As I showed in Part Two, the structure of capi¬ 
tal was totally transformed between the eighteenth century and the begin¬ 
ning of the twentieth century (landed capital was almost entirely replaced by 
industrial and financial capital and real estate), but total wealth, measured in 
years of national income, remained relatively stable. In particular, the French 
Revolution had relatively little effect on the capital/income ratio. As just 
shown, the Revolution also had relatively little effect on the distribution of 
wealth. In 1810-1820, the epoch of Pere Goriot, Rastignac, and Mademoi¬ 
selle Victorine, wealth was probably slightly less unequally distributed than 
during the Ancien Regime, but the difference was really rather minimal: 
both before and after the Revolution, France was a patrimonial society char¬ 
acterized by a hyperconcentration of capital, in which inheritance and mar¬ 
riage played a key role and inheriting or marrying a large fortune could pro¬ 
cure a level of comfort not obtainable through work or study. In the Belle 
Epoque, wealth was even more concentrated than when Vautrin lectured 
Rastignac. At bottom, however, France remained the same society, with the 
same basic structure of inequality, from the Ancien Regime to the Third 
Republic, despite the vast economic and political changes that took place in 
the interim. 

Probate records also enable us to observe that the decrease in the upper 
decile’s share of national wealth in the twentieth century benefited the 
middle 40 percent of the population exclusively, while the share of the 
poorest 50 percent hardly increased at all (it remained less than 5 percent of 
total wealth). Throughout the nineteenth and twentieth centuries, the bot¬ 
tom half of the population had virtually zero net wealth. In particular, we 
find that at the time of death, individuals in the poorest half of the wealth 


342 


INEQUALITY OF CAPITAL OWNERSHIP 


distribution owned no real estate or financial assets that could be passed on 
to heirs, and what little wealth they had went entirely to expenses linked to 
death and to paying off debts (in which case the heirs generally chose to re¬ 
nounce their inheritance). The proportion of individuals in this situation at 
the time of death exceeded two-thirds in Paris throughout the nineteenth 
century and until the eve of World War I, and there was no downward 
trend. Pere Goriot belonged to this vast group, dying as he did abandoned 
by his daughters and in abject poverty: his landlady, Madame Vauquer, 
dunned Rastignac for what the old man owed her, and he also had to pay 
the cost of burial, which exceeded the value of the deceased’s meager per¬ 
sonal effects. Roughly half of all French people in the nineteenth century 
died in similar circumstances, without any wealth to convey to heirs, or 
with only negative net wealth, and this proportion barely budged in the 
twentieth century. 9 

Inequality of Capital in Belle Epoque Europe 

The available data for other European countries, though imperfect, unambigu¬ 
ously demonstrate that extreme concentration of wealth in the eighteenth 
and nineteenth centuries and until the eve of World War I was a European 
and not just a French phenomenon. 

In Britain, we have detailed probate data from 1910-1920 on, and these 
records have been exhaustively studied by many investigators (most notably 
Atkinson and Harrison). If we complete these statistics with estimates from 
recent years as well as the more robust but less homogeneous estimates that 
Peter Linder has made for the period 1810-1870 (based on samples of estate 
inventories), we find that the overall evolution was very similar to the French 
case, although the level of inequality was always somewhat greater in Britain. 
The top decile’s share of total wealth was on the order of 85 percent from 1810 
to 1870 and surpassed 90 percent in 1900-1910; the uppermost centile’s share 
rose from 55-60 percent in 1810-1870 to nearly 70 percent in 1910-1920 (see 
Figure 10.3). The British sources are imperfect, especially for the nineteenth 
century, but the orders of magnitude are quite clear: wealth in Britain was 
extremely concentrated in the nineteenth century and showed no tendency 
to decrease before 1914. From a French perspective, the most striking fact is 
that inequality of capital ownership was only slightly greater in Britain than 


343 


Share of top decile or top percentile in total wealth 


THE STRUCTURE OF INEQUALITY 



figure 10.3. Wealth inequality in Britain, 1810-2010 

The top decile owns 80-90 percent of total wealth in 1810-1910, and 70 percent today. 
Sources and series: see piketty.pse.ens.fr/capital21c 


in France during the Belle Epoque, even though Third Republic elites at the 
time liked to portray France as an egalitarian country compared with its 
monarchical neighbor across the Channel. In fact, the formal nature of the 
political regime clearly had very little influence on the distribution of wealth 
in the two countries. 

In Sweden, where the very rich data available from 1910, of which Ohl- 
sonn, Roine, and Waldenstrom have recently made use, and for which we also 
have estimates for the period 1810-1870 (by Lee Soltow in particular), we find 
a trajectory very similar to what we observed in France and Britain (see Figure 
10.4). Indeed, the Swedish wealth data confirm what we already know from 
income statements: Sweden was not the structurally egalitarian country that 
we sometimes imagine. To be sure, the concentration of wealth in Sweden in 
1970-1980 attained the lowest level of inequality observed in any of our his¬ 
torical series (with barely 50 percent of total wealth owned by the top decile 
and slightly more than 15 percent by the top centile). This is still a fairly high 
level of inequality, however, and, what is more, inequality in Sweden has in¬ 
creased significantly since 1980-1990 (and in 2010 was just slightly lower than 
in France). It is worth stressing, moreover, that Swedish wealth was as concen- 


344 
































Share of top decile or percentile in total wealth 


INEQUALITY OF CAPITAL OWNERSHIP 



figure 10.4. Wealth inequality in Sweden, 1810-2010 

The top 10 percent holds 80-90 percent of total wealth in 1810-1910 and 55-60 percent 
today. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


trated as French and British wealth in 1900-1910. In the Belle Epoque, wealth 
was highly concentrated in all European countries. It is essential to under¬ 
stand why this was so, and why things changed so much over the course of the 
twentieth century. 

Note, moreover, that we also find the same extremely high concentration 
of wealth—with 80 to 90 percent of capital owned by the top decile and 50- 
do percent by the top centile—in most societies prior to the nineteenth cen¬ 
tury, and in particular in traditional agrarian societies in the modern era, as 
well as in the Middle Ages and antiquity. The available sources are not suffi¬ 
ciently robust to permit precise comparisons or study temporal evolutions, 
but the orders of magnitude obtained for the shares of the top decile and 
centile in total wealth (and especially in total farmland) are generally close to 
what we find in France, Britain, and Sweden in the nineteenth century and 
Belle Epoque . 10 


345 







































THE STRUCTURE OF INEQUALITY 


The Emergence of the Patrimonial Middle Class 

Three questions will concern us in the remainder of this chapter. Why were 
inequalities of wealth so extreme, and increasing, before World War I? And 
why, despite the fact that wealth is once again prospering at the beginning of 
the twenty-first century as it did at the beginning of the twentieth century (as 
the evolution of the capital/income ratio shows), is the concentration of 
wealth today significantly below its historical record high? Finally, is this state 
of affairs irreversible? 

In fact, the second conclusion that emerges very clearly from the French 
data presented in Figure io.i is that the concentration of wealth, as well as the 
concentration of income from wealth, has never fully recovered from the 
shocks of 1914-1945. The upper decile’s share of total wealth, which attained 
90 percent in 1910-1920, fell to 60-70 percent in 1950-1970; the upper cen- 
tile’s share dropped even more precipitously, from 60 percent in 1910-1920 to 
20-30 percent in 1950-1970. Compared with the trend prior to World War I, 
the break is clear and overwhelming. To be sure, inequality of wealth began to 
increase again in 1980-1990, and financial globalization has made it more and 
more difficult to measure wealth and its distribution in a national framework: 
inequality of wealth in the twenty-first century will have to be gauged more 
and more at the global level. Despite these uncertainties, however, there is no 
doubt that inequality of wealth today stands significantly below its level of a 
century ago: the top decile’s share is now around 60-65 percent, which, though 
still quite high, is markedly below the level attained in the Belle Fpoque. The 
essential difference is that there is now a patrimonial middle class, which 
owns about a third of national wealth—a not insignificant amount. 

The available data for the other European countries confirm that this has 
been a general phenomenon. In Britain, the upper decile’s share fell from more 
than 90 percent on the eve of World War I to 60-65 percent in the 1970s; it is 
currently around 70 percent. The top centile’s share collapsed in the wake of 
the twentieth century’s shocks, falling from nearly 70 percent in 1910-1920 to 
barely more than 20 percent in 1970-1980, then rising to 25-30 percent today 
(see Figure 10.3). In Sweden, capital ownership was always less concentrated 
than in Britain, but the overall trajectory is fairly similar (see Figure 10.4). In 
every case, we find that what the wealthiest 10 percent lost mainly benefited 
the “patrimonial middle class” (defined as the middle 40 percent of the wealth 


346 


INEQUALITY OF CAPITAL OWNERSHIP 


hierarchy) and did not go to the poorest half of the population, whose share of 
total wealth has always been minuscule (generally around 5 percent), even in 
Sweden (where it was never more than 10 percent). In some cases, such as Brit¬ 
ain, we find that what the richest 1 percent lost also brought significant gains 
to the next lower 9 percent. Apart from such national specificities, however, 
the general similarity of the various European trajectories is quite striking. The 
major structural transformation was the emergence of a middle group, repre¬ 
senting nearly half the population, consisting of individuals who managed to 
acquire some capital of their own—enough so that collectively they came to 
own one-quarter to one-third of the nation’s total wealth. 

Inequality of Wealth in America 

I turn now to the US case. Here, too, we have probate statistics from 1910- 
1920 on, and these have been heavily exploited by researchers (especially Lamp- 
man, Kopczuk, and Saez). To be sure, there are important caveats associated 
with the use of these data, owing to the small percentage of the population 
covered by the federal estate tax. Nevertheless, estimates based on the probate 
data can be supplemented by information front the detailed wealth surveys 
that the Federal Reserve Bank has conducted since the 1960s (used notably by 
Arthur Kennickell and Edward Wolff), and by less robust estimates for the 
period 1810-1870 based on estate inventories and wealth census data exploited 
respectively by Alice Hanson Jones and Lee Soltow . 11 

Several important differences between the European and US trajectories 
stand out. First, it appears that inequality of wealth in the United States around 
1800 was not much higher than in Sweden in 1970-1980. Since the United 
States was a new country whose population consisted largely of immigrants 
who came to the New World with little or no wealth, this is not very surpris¬ 
ing: not enough time had passed for wealth to be accumulated or concen¬ 
trated. The data nevertheless leave much to be desired, and there is some varia¬ 
tion between the northern states (where estimates suggest a level of inequality 
lower than that of Sweden in 1970-1980) and southern states (where inequal¬ 
ity was closer to contemporary European levels ). 12 

It is a well-established fact that wealth in the United States became increas¬ 
ingly concentrated over the course of the nineteenth century. In 1910, capital 
inequality there was very high, though still markedly lower than in Europe: 


347 


Share of top decile or percentile in total wealth 


THE STRUCTURE OF INEQUALITY 



FIGURE 10.5. Wealth inequality in the United States, 1810-2010 

The top 10 percent wealth holders own about 80 percent of total wealth in 1910 and 75 

percent today. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


the top decile owned about 80 percent of total wealth and the top centile 
around 45 percent (see Figure 10.5). Interestingly, the fact that inequality in the 
New World seemed to be catching up with inequality in old Europe greatly 
worried US economists at the time. Willford King’s book on the distribution 
of wealth in the United States in 1915—the first broad study of the question—is 
particularly illuminating in this regard. 13 From today’s perspective, this may 
seem surprising: we have been accustomed for several decades now to the fact 
that the United States is more inegalitarian than Europe and even that many 
Americans are proud of the fact (often arguing that inequality is a prerequisite 
of entrepreneurial dynamism and decrying Europe as a sanctuary of Soviet- 
style egalitarianism). A century ago, however, both the perception and the re¬ 
ality were strictly the opposite: it was obvious to everyone that the New World 
was by nature less inegalitarian than old Europe, and this difference was also a 
subject of pride. In the late nineteenth century, in the period known as the 
Gilded Age, when some US industrialists and financiers (for example John D. 
Rockefeller, Andrew Carnegie, and J. P. Morgan) accumulated unprecedented 
wealth, many US observers were alarmed by the thought that the country was 


348 































Share of top decile or percentile in total wealth 


INEQUALITY OF CAPITAL OWNERSHIP 



figure 10.6. Wealth inequality in Europe versus the United States, 1810-2010 
Until the mid-twentieth century, wealth inequality was higher in Europe than in the 
United States. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


losing its pioneering egalitarian spirit. To be sure, that spirit was partly a myth, 
but it was also partly justified by comparison with the concentration of wealth 
in Europe. In Part Four we will see that this fear of growing to resemble Eu¬ 
rope was part of the reason why the United States in 1910-1920 pioneered a 
very progressive estate tax on large fortunes, which were deemed to be incom¬ 
patible with US values, as well as a progressive income tax on incomes thought 
to be excessive. Perceptions of inequality, redistribution, and national identity 
changed a great deal over the course of the twentieth century, to put it mildly. 

Inequality of wealth in the United States decreased between 1910 and 
1950, just as inequality of income did, but much less so than in Europe: of 
course it started from a lower level, and the shocks of war were less violent. By 
2010, the top decile’s share of total wealth exceeded 70 percent, and the top 
centile’s share was close to 35 percent. 14 

In the end, the deconcentration of wealth in the United States over the 
course of the twentieth century was fairly limited: the top decile’s share of 
total wealth dropped from 80 to 70 percent, whereas in Europe it fell from 90 
to 60 percent (see Figure 10.6). 15 


349 



































THE STRUCTURE OF INEQUALITY 


The differences between the European and US experiences are clear. In 
Europe, the twentieth century witnessed a total transformation of society: 
inequality of wealth, which on the eve of World War I was as great as it had 
been under the Ancien Regime, fell to an unprecedentedly low level, so low 
that nearly half the population were able to acquire some measure of wealth 
and for the first time to own a significant share of national capital. This is part 
of the explanation for the great wave of enthusiasm that swept over Europe in 
the period 1945-1975. People felt that capitalism had been overcome and that 
inequality and class society had been relegated to the past. It also explains why 
Europeans had a hard time accepting that this seemingly ineluctable social 
progress ground to a halt after 1980, and why they are still wondering when 
the evil genie of capitalism will be put back in its bottle. 

In the United States, perceptions are very different. In a sense, a (white) 
patrimonial middle class already existed in the nineteenth century. It suffered 
a setback during the Gilded Age, regained its health in the middle of the 
twentieth century, and then suffered another setback after 1980. This “yo-yo” 
pattern is reflected in the history of US taxation. In the United States, the 
twentieth century is not synonymous with a great leap forward in social jus¬ 
tice. Indeed, inequality of wealth there is greater today than it was at the be¬ 
ginning of the nineteenth century. Hence the lost US paradise is associated 
with the country’s beginnings: there is nostalgia for the era of the Boston Tea 
Party, not for Trente Glorieuses and a heyday of state intervention to curb the 
excesses of capitalism. 

The Mechanism of Wealth Divergence: r versus gin History 

Let me try now to explain the observed facts: the hyperconcentration of 
wealth in Europe during the nineteenth century and up to World War I; the 
substantial compression of wealth inequality following the shocks of 1914- 
1945; and the fact that the concentration of wealth has not—thus far— 
regained the record heights set in Europe in the past. 

Several mechanisms may be at work here, and to my knowledge there is no 
evidence that would allow us to determine the precise share of each in the 
overall movement. We can, however, try to hierarchize the different mecha¬ 
nisms with the help of the available data and analyses. Here is the main con¬ 
clusion that I believe we can draw from what we know. 


350 


INEQUALITY OF CAPITAL OWNERSHIP 


The primary reason for the hyperconcentration of wealth in traditional 
agrarian societies and to a large extent in all societies prior to World War I 
(with the exception of the pioneer societies of the New World, which are for 
obvious reasons very special and not representative of the rest of the world or 
the long run) is that these were low-growth societies in which the rate of re¬ 
turn on capital was markedly and durably higher than the rate of growth. 

This fundamental force for divergence, which I discussed briefly in the 
Introduction, functions as follows. Consider a world of low growth, on the or¬ 
der of, say, 0.5-1 percent a year, which was the case everywhere before the 
eighteenth and nineteenth centuries. The rate of return on capital, which is 
generally on the order of 4 or 5 percent a year, is therefore much higher than 
the growth rate. Concretely, this means that wealth accumulated in the past 
is recapitalized much more quickly than the economy grows, even when there 
is no income from labor. 

For example, if g=i% and r— 5%, saving one-fifth of the income from 
capital (while consuming the other four-fifths) is enough to ensure that capi¬ 
tal inherited from the previous generation grows at the same rate as the econ¬ 
omy. If one saves more, because one’s fortune is large enough to live well while 
consuming somewhat less of one’s annual rent, then one’s fortune will in¬ 
crease more rapidly than the economy, and inequality of wealth will tend to 
increase even if one contributes no income from labor. For strictly mathemat¬ 
ical reasons, then, the conditions are ideal for an “inheritance society” to 
prosper—where by “inheritance society” I mean a society characterized by both 
a very high concentration of wealth and a significant persistence of large for¬ 
tunes from generation to generation. 

Now, it so happens that these conditions existed in any number of societies 
throughout history, and in particular in the European societies of the nine¬ 
teenth century. As Figure 10.7 shows, the rate of return on capital was signifi¬ 
cantly higher than the growth rate in France from 1820 to 1913, around 5 per¬ 
cent on average compared with a growth rate of around 1 percent. Income 
from capital accounted for nearly 40 percent of national income, and it was 
enough to save one-quarter of this to generate a savings rate on the order of 10 
percent (see Figure 10.8). This was sufficient to allow wealth to grow slightly 
more rapidly than income, so that the concentration of wealth trended upward. 
In the next chapter I will show that most wealth in this period did come from 
inheritance, and this supremacy of inherited capital, despite the period’s great 


351 


Capital share or saving rate (% national income) Annual rate of return or rate of growth 


THE STRUCTURE OF INEQUALITY 



figure 10.7. Return to capital and growth: France, 1820-1913 

The rate of return on capital is a lot higher than the growth rate in France between 
1820 and 1913. 

Sources and series: see piketty.pse.ens.fr/capital21c. 



FIGURE 10.8. Capital share and saving rate: France, 1820-1913 

The share of capital income in national income is much larger than the saving rate in 
France between 1820 and 1913. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


352 

















































































INEQUALITY OF CAPITAL OWNERSHIP 


economic dynamism and impressive financial sophistication, is explained by 
the dynamic effects of the fundamental inequality r>g: the very rich French 
probate data allow us to be quite precise about this point. 

Why Is the Return on Capital Greater Than the Groivth Rate? 

Let me pursue the logic of the argument. Are there deep reasons why the re¬ 
turn on capital should be systematically higher than the rate of growth? To be 
clear, I take this to be a historical fact, not a logical necessity. 

It is an incontrovertible historical reality that r was indeed greater than g 
over a long period of time. Many people, when first confronted with this 
claim, express astonishment and wonder why it should be true. The most ob¬ 
vious way to convince oneself that r >g is indeed a historical fact is no doubt 
the following. 

As I showed in Part One, economic growth was virtually nil throughout 
much of human history: combining demographic with economic growth, we 
can say that the annual growth rate from antiquity to the seventeenth century 
never exceeded o.1-0.2 percent for long. Despite the many historical uncer¬ 
tainties, there is no doubt that the rate of return on capital was always consid¬ 
erably greater than this: the central value observed over the long run is 4-5 
percent a year. In particular, this was the return on land in most traditional 
agrarian societies. Even if we accept a much lower estimate of the pure yield 
on capital—for example, by accepting the argument that many landowners 
have made over the years that it is no simple matter to manage a large estate, 
so that this return actually reflects a just compensation for the highly skilled 
labor contributed by the owner—we would still be left with a minimum (and 
to my mind unrealistic and much too low) return on capital of at least 2-3 
percent a year, which is still much greater than o. 1-0.2 percent. Thus through¬ 
out most of human history, the inescapable fact is that the rate of return on 
capital was always at least 10 to 20 times greater than the rate of growth of 
output (and income). Indeed, this fact is to a large extent the very foundation 
of society itself: it is what allowed a class of owners to devote themselves to 
something other than their own subsistence. 

In order to illustrate this point as clearly as possible, I have shown in 
Figure 10.9 the evolution of the global rate of return on capital and the growth 
rate from antiquity to the twenty-first century. 


353 


THE STRUCTURE OF INEQUALITY 



FIGURE 10.9. Rate of return versus growth rate at the world level, from Antiquity 
until 2100 

The rate of return to capital (pretax) has always been higher than the world growth 
rate, but the gap was reduced during the twentieth century, and might widen again in 
the twenty-first century. 

Sources and series: see piketty.pse.ens.fr/capital21c 


These are obviously approximate and uncertain estimates, but the orders 
of magnitude and overall evolutions may be taken as valid. For the global 
growth rate, I have used the historical estimates and projections discussed in 
Part One. For the global rate of return on capital, I have used the estimates for 
Britain and France in the period 1700-2010, which were analyzed in Part 
Two. For early periods, I have used a pure return of 4.5 percent, which should 
be taken as a minimum value (available historical data suggest average returns 
on the order of 5-6 percent). 16 For the twenty-first century, I have assumed 
that the value observed in the period 1990-2010 (about 4 percent) will con¬ 
tinue, but this is of course uncertain: there are forces pushing toward a lower 
return and other forces pushing toward a higher. Note, too, that the returns 
on capital in Figure 10.8 are pretax returns (and also do not take account of 
capital losses due to war, or of capital gains and losses, which were especially 
large in the twentieth century). 


354 


































INEQUALITY OF CAPITAL OWNERSHIP 


As Figure 10.9 shows, the pure rate of return on capital—generally 4-5 
percent—has throughout history always been distinctly greater than the 
global growth rate, but the gap between the two shrank significantly during 
the twentieth century, especially in the second half of the century, when the 
global economy grew at a rate of 3.5-4 percent a year. In all likelihood, the gap 
will widen again in the twenty-first century as growth (especially demographic 
growth) slows. According to the central scenario discussed in Part One, 
global growth is likely to be around 1.5 percent a year between 2050 and 2100, 
roughly the same rate as in the nineteenth century. The gap between r andg' 
would then return to a level comparable to that which existed during the In¬ 
dustrial Revolution. 

In such a context, it is easy to see that taxes on capital—and shocks of vari¬ 
ous kinds—can play a central role. Before World War I, taxes on capital were 
very low (most countries did not tax either personal income or corporate prof¬ 
its, and estate taxes were generally no more than a few percent). To simplify 
matters, we may therefore assume that the rate of return on capital was virtu¬ 
ally the same after taxes as before. After World War I, the tax rates on top in¬ 
comes, profits, and wealth quickly rose to high levels. Since the 1980s, how¬ 
ever, as the ideological climate changed dramatically under the influence of 
financial globalization and heightened competition between states for capital, 
these same tax rates have been falling and in some cases have almost entirely 
disappeared. 

Figure 10.10 shows my estimates of the average return on capital after taxes 
and after accounting for estimated capital losses due to destruction of prop¬ 
erty in the period 1913-1950. For the sake of argument, I have also assumed 
that fiscal competition will gradually lead to total disappearance of taxes on 
capital in the twenty-first century: the average tax rate on capital is set at 30 
percent for 1913-2012,10 percent for 2012-2050, and o percent in 2050-2100. 
Of course, things are more complicated in practice: taxes vary enormously, 
depending on the country and type of property. At times, they are progressive 
(meaning that the tax rate increases with the level of income or wealth, at 
least in theory), and obviously it is not foreordained that fiscal competition 
must proceed to its ultimate conclusion. 

Under these assumptions, we find that the return on capital, net of 
taxes (and losses), fell to 1-1.5 percent in the period 1913-1950, which was 
less than the rate of growth. This novel situation continued in the period 


355 


Annual rate of return or rate of growth 


THE STRUCTURE OF INEQUALITY 



FIGURE io.io. After tax rate of return versus growth rate at the world level, from 
Antiquity until 2100 

The rate of return to capital (after tax and capital losses) fell below the growth rate 
during the twentieth century, and may again surpass it in the twenty-first century. 
Sources and series: see piketty.pse.ens.fr/capital21c. 


1950-2012 owing to the exceptionally high growth rate. Ultimately, we 
find that in the twentieth century, both fiscal and nonfiscal shocks created 
a situation in which, for the first time in history, the net return on capital 
was less than the growth rate. A concatenation of circumstances (wartime 
destruction, progressive tax policies made possible by the shocks of 1914- 
1945, and exceptional growth during the three decades following the end 
of World War II) thus created a historically unprecedented situation, 
which lasted for nearly a century. All signs are, however, that it is about to 
end. If fiscal competition proceeds to its logical conclusion—which it 
may—the gap between r and g will return at some point in the twenty-first 
century to a level close to what it was in the nineteenth century (see Figure 
10.10). If the average tax rate on capital stays at around 30 percent, which is 
by no means certain, the net rate of return on capital will most likely rise 
to a level significantly above the growth rate, at least if the central scenario 
turns out to be correct. 


356 































Annual rate of return or rate of growth 


INEQUALITY OF CAPITAL OWNERSHIP 



FIGURE io.ii. After tax rate of return versus growth rate at the world level, from 
Antiquity until 1200 

The rate of return to capital (after tax and capital losses) fell below the growth rate during 
the twentieth century, and might again surpass it in the twenty-first century. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


To bring this possible evolution out even more clearly, I have combined in 
Figure 10.11 the two subperiods 1913-1950 and 1950-2012 into a single average 
for the century 1913-2012, the unprecedented era during which the net rate 
of return on capital was less than the growth rate. I have also combined the 
two subperiods 2012-2050 and 2050-2100 into a single average for 2012- 
2100 and assumed that the rates for the second half of the twenty-first cen¬ 
tury would continue into the twenty-second century (which is of course by 
no means guaranteed). In any case, Figure 10.11 at least brings out the 
unprecedented—and possibly unique—character of the twentieth century in 
regard to the relation between r and g. Note, too, that the hypothesis that 
global growth will continue at a rate of 1.5 percent a year over the very long 
run is regarded as excessively optimistic by many observers. Recall that the 
average growth of global per capita output was 0.8 percent a year between 
1700 and 2012, and demographic growth (which also averaged 0.8 percent a 
year over the past three centuries) is expected to drop sharply between now 


357 






























THE STRUCTURE OF INEQUALITY 


and the end of the twenty-first century (according to most forecasts). Note, 
however, that the principal shortcoming of Figure io.ii is that it relies on the 
assumption that no significant political reaction will alter the course of 
capitalism and financial globalization over the course of the next two cen¬ 
turies. Given the tumultuous history of the past century, this is a dubious 
and to my mind not very plausible hypothesis, precisely because its inegali¬ 
tarian consequences would be considerable and would probably not be tol¬ 
erated indefinitely. 

To sum up: the inequality r >g has clearly been true throughout most of 
human history, right up to the eve of World War I, and it will probably be true 
again in the twenty-first century. Its truth depends, however, on the shocks to 
which capital is subject, as well as on what public policies and institutions are 
put in place to regulate the relationship between capital and labor. 

The Question of Time Preference 

To recap: the inequality r >g is a contingent historical proposition, which is 
true in some periods and political contexts and not in others. From a strictly 
logical point of view, it is perfectly possible to imagine a society in which the 
growth rate is greater than the return on capital—even in the absence of state 
intervention. Everything depends on the one hand on technology (what is 
capital used for?) and on the other on attitudes toward saving and property 
(why do people choose to hold capital?). As noted, it is perfectly possible to 
imagine a society in which capital has no uses (other than to serve as a pure 
store of value, with a return strictly equal to zero), but in which people would 
choose to hold a lot of it, in anticipation, say, of some future catastrophe or 
grand potlatch or simply because they are particularly patient and take a gen¬ 
erous attitude toward future generations. If, moreover, productivity growth 
in this society is rapid, either because of constant innovation or because the 
country is rapidly catching up with more technologically advanced countries, 
then the growth rate may very well be distinctly higher than the rate of return 
on capital. 

In practice, however, there appears never to have been a society in which the 
rate of return on capital fell naturally and persistently to less than 2-3 percent, 
and the mean return we generally see (averaging over all types of investments) is 
generally closer to 4-5 percent (before taxes). In particular, the return on agri- 


358 


INEQUALITY OF CAPITAL OWNERSHIP 


cultural land in traditional societies, like the return on real estate in today’s 
societies—these being the most common and least risky forms of investment in 
each case—is generally around 4-5 percent, with perhaps a slight downward 
trend over the very long run (to 3-4 percent rather than 4-5). 

The economic model generally used to explain this relative stability of the 
return on capital at around 4-5 percent (as well as the fact that it never falls 
below 2-3 percent) is based on the notion of “time preference” in favor of the 
present. In other words, economic actors are characterized by a rate of time 
preference (usually denoted 0) that measures how impatient they are and how 
they take the future into account. For example, if 0 = 5 percent, the actor in 
question is prepared to sacrifice 105 euros of consumption tomorrow in order 
to consume an additional 100 euros today. This “theory,” like many theoreti¬ 
cal models in economics, is somewhat tautological (one can always explain 
any observed behavior by assuming that the actors involved have preferences— 
or “utility functions” in the jargon of the profession—that lead them to act 
that way), and its predictive power is radical and implacable. In the case in 
point, assuming a zero-growth economy, it is not surprising to discover that 
the rate of return on capital must equal the time preference 0 . 17 According to 
this theory, the reason why the return on capital has been historically stable at 
4-5 percent is ultimately psychological: since this rate of return reflects the 
average person’s impatience and attitude toward the future, it cannot vary 
much from this level. 

In addition to being tautological, the theory raises a number of other dif¬ 
ficulties. To be sure, the intuition that lies behind the model (like that which 
lies behind marginal productivity theory) cannot be entirely wrong. All other 
things equal, a more patient society, or one that anticipates future shocks, will 
of course amass greater reserves and accumulate more capital. Similarly, if a 
society accumulates so much capital that the return on capital is persistently 
low, say, 1 percent a year (or in which all forms of wealth, including the prop¬ 
erty of the middle and lower classes, are taxed so that the net return is very 
low), then a significant proportion of property-owning individuals will seek 
to sell their homes and financial assets, thus decreasing the capital stock until 
the yield rises. 

The problem with the theory is that it is too simplistic and systematic: it is 
impossible to encapsulate all savings behavior and all attitudes toward the 
future in a single inexorable psychological parameter. If we take the most 


359 


THE STRUCTURE OF INEQUALITY 


extreme version of the model (called the “infinite horizon” model, because 
agents calculate the consequences of their savings strategy for all their descen¬ 
dants until the end of time as though they were thinking of themselves, in 
accordance with their own rate of time preference), it follows that the net rate 
of return on capital cannot vary by even as little as a tenth of a percent: any 
attempt to alter the net return (for example, by changing tax policy) will trig¬ 
ger an infinitely powerful reaction in one sense or another (saving or dissav¬ 
ing) in order to force the net return back to its unique equilibrium. Such a 
prediction is scarcely realistic: history shows that the elasticity of saving is 
positive but not infinite, especially when the rate of return varies within mod¬ 
erate and reasonable limits . 18 

Another difficulty with this theoretical model (in its strictest interpreta¬ 
tion) is that it implies that the rate of return on capital, r, must, in order to 
maintain the economy in equilibrium, rise very rapidly with the growth rate 
g, so that the gap between r and g should be greater in a rapidly growing 
economy than in one that is not growing at all. Once again, this prediction is 
not very realistic, nor is it compatible with historical experience (the return 
on capital may rise in a rapidly growing economy but probably not enough to 
increase the gap r —g significantly, to judge by observed historical experience), 
and it, too, is a consequence of the infinite horizon hypothesis. Note, how¬ 
ever, that the intuition here is again partially valid and in any case interesting 
from a strictly logical point of view. In the standard economic model, based 
on the existence of a “perfect” market for capital (in which each owner of 
capital receives a return equal to the highest marginal productivity available 
in the economy, and everyone can borrow as much as he or she wants at that 
rate), the reason why the return on capital, r, is systematically and necessarily 
higher than the growth rat e,g, is the following. If r were less than^, economic 
agents, realizing that their future income (and that of their descendants) will 
rise faster than the rate at which they can borrow, will feel infinitely wealthy 
and will therefore wish to borrow without limit in order to consume immedi¬ 
ately (until r rises above g). In this extreme form, the mechanism is not en¬ 
tirely plausible, but it shows that r>g is true in the most standard of economic 
models and is even more likely to be true as capital markets become more 
efficient . 19 

To recap: savings behavior and attitudes toward the future cannot be en¬ 
capsulated in a single parameter. These choices need to be analyzed in more 


360 


INEQUALITY OF CAPITAL OWNERSHIP 


complex models, involving not only time preference but also precautionary 
savings, life-cycle effects, the importance attached to wealth in itself, and 
many other factors. These choices depend on the social and institutional envi¬ 
ronment (such as the existence of a public pension system), family strategies 
and pressures, and limitations that social groups impose on themselves (for 
example, in some aristocratic societies, heirs are not free to sell family prop¬ 
erty), in addition to individual psychological and cultural factors. 

To my way of thinking, the inequality r >g should be analyzed as a his¬ 
torical reality dependent on a variety of mechanisms and not as an absolute 
logical necessity. It is the result of a confluence of forces, each largely indepen¬ 
dent of the others. For one thing, the rate of growth, g, tends to be structur¬ 
ally low (generally not much more than i percent a year once the demographic 
transition is complete and the country reaches the world technological fron¬ 
tier, where the pace of innovation is fairly slow). For another, the rate of re¬ 
turn on capital, r, depends on many technological, psychological, social, and 
cultural factors, which together seem to result in a return of roughly 4-5 
percent (in any event distinctly greater than 1 percent). 

Is There an Equilibrium Distribution ? 

Let me now turn to the consequences of r >g for the dynamics of the wealth 
distribution. The fact that the return on capital is distinctly and persistently 
greater than the growth rate is a powerful force for a more unequal distribu¬ 
tion of wealth. For example, if g— 1 percent and r = 5 percent, wealthy individ¬ 
uals have to reinvest only one-fifth of their annual capital income to ensure 
that their capital will grow faster than average income. Under these conditions, 
the only forces that can avoid an indefinite inegalitarian spiral and stabilize 
inequality of wealth at a finite level are the following. First, if the fortunes 
of wealthy individuals grow more rapidly than average income, the capital/ 
income ratio will rise indefinitely, which in the long run should lead to a de¬ 
crease in the rate of return on capital. Nevertheless, this mechanism can take 
decades to operate, especially in an open economy in which wealthy individu¬ 
als can accumulate foreign assets, as was the case in Britain and France in the 
nineteenth century and up to the eve of World War I. In principle, this pro¬ 
cess always comes to an end (when those who own foreign assets take posses¬ 
sion of the entire planet), but this can obviously take time. This process was 


361 


THE STRUCTURE OF INEQUALITY 


largely responsible for the vertiginous increase in the top centile’s share of 
wealth in Britain and France during the Belle Fpoque. 

Furthermore, in regard to the trajectories of individual fortunes, this di¬ 
vergent process can be countered by shocks of various kinds, whether demo¬ 
graphic (such as the absence of an heir or the presence of too many heirs, 
leading to dispersal of the family capital, or early death, or prolonged life) or 
economic (such as a bad investment or a peasant uprising or a financial crisis 
or a mediocre season, etc.). Shocks of this sort always affect family fortunes, 
so that changes in the wealth distribution occur even in the most static societ¬ 
ies. Note, moreover, the importance of demographic choices (the fewer chil¬ 
dren the rich choose to have, the more concentrated wealth becomes) and 
inheritance laws. 

Many traditional aristocratic societies were based on the principle of pri¬ 
mogeniture: the eldest son inherited all (or at any rate a disproportionately 
large share) of the family property so as to avoid fragmentation and to pre¬ 
serve or increase the family’s wealth. The eldest son’s privilege concerned the 
family’s primary estate in particular and often placed heavy constraints on 
the property: the heir was not allowed to diminish its value and was obliged 
to live on the income from the capital, which was then conveyed in turn to 
the next heir in the line of succession, usually the eldest grandson. In British 
law this was the system of “entails” (the equivalent in French law being the 
system of substitution hereditaire under the Ancien Regime). It was the reason 
for the misfortune of Elinor and Marianne in Sense and Sensibility: the Nor¬ 
land estate passed directly to their father and half-brother, John Dashwood, 
who decided, after considering the matter with his wife, Fanny, to leave them 
nothing. The fate of the two sisters is a direct consequence of this sinister con¬ 
versation. In Persuasion, Sir Walter’s estate goes directly to his nephew, by¬ 
passing his three daughters. Jane Austen, herself disfavored by inheritance 
and left a spinster along with her sister, knew what she was talking about. 

The inheritance law that derived from the French Revolution and the 
Civil Code that followed rested on two main pillars: the abolition o£substitu¬ 
tions hereditaires and primogeniture and the adoption of the principle of 
equal division of property among brothers and sisters (equipartition). This 
principle has been applied strictly and consistently since 1804: in France, the 
quotite disponible (that is, the share of the estate that parents are free to dis¬ 
pose of as they wish) is only a quarter of total wealth for parents with three or 


362 


INEQUALITY OF CAPITAL OWNERSHIP 


more children, 20 and exemption is granted only in extreme circumstances (for 
example, if the children murder their stepmother). It is important to under¬ 
stand that the new law was based not only on a principle of equality (younger 
children were valued as much as the eldest and protected from the whims of 
the parents) but also on a principle of liberty and economic efficiency. In par¬ 
ticular, the abolition of entails, which Adam Smith disliked and Voltaire, 
Rousseau, and Montesquieu abhorred, rested on a simple idea: this abolition 
allowed the free circulation of goods and the possibility of reallocating prop¬ 
erty to the best possible use in the judgment of the living generation, despite 
what dead ancestors may have thought. Interestingly, after considerable de¬ 
bate, Americans came to the same conclusion in the years after the Revolu¬ 
tion: entails were forbidden, even in the South. As Thomas Jefferson famously 
put it, “the Earth belongs to the living.” And equipartition of estates among 
siblings became the legal default, that is, the rule that applied in the absence 
of an explicit will (although the freedom to make one’s will as one pleases still 
prevails in both the United States and Britain, in practice most estates are 
equally divided among siblings). This was an important difference between 
France and the United States on the one hand, where the law of equipartition 
applied from the nineteenth century on, and Britain on the other, where primo¬ 
geniture remained the default in 1925 for a portion of the parental property, 
namely, landed and agricultural capital. 21 In Germany, it was not until the Wei¬ 
mar Republic that the German equivalent of entails was abolished in 1919. 22 

During the French Revolution, this egalitarian, antiauthoritarian, liberal 
legislation (which challenged parental authority while affirming that of the 
new family head, in some case to the detriment of his spouse) was greeted 
with considerable optimism, at least by men—despite being quite radical for 
the time . 23 Proponents of this revolutionary legislation were convinced that 
they had found the key to future equality. Since, moreover, the Civil Code 
granted everyone equal rights with respect to the market and property, and 
guilds had been abolished, the ultimate outcome seemed clear: such a system 
would inevitably eliminate the inequalities of the past. The marquis de Con- 
dorcet gave forceful expression to this optimistic view in his Esquisse d’un 
tableau historique desprogres de I’esprit humain (1794): “It is easy to prove that 
fortunes tend naturally toward equality, and that excessive differences of 
wealth either cannot exist or must promptly cease, if the civil laws do not es¬ 
tablish artificial ways of perpetuating and amassing such fortunes, and if 


363 


THE STRUCTURE OF INEQUALITY 


freedom of commerce and industry eliminate the advantage that any prohibi¬ 
tive law or fiscal privilege gives to acquired wealth.” 24 

The Civil Code and the Illusion of the French Revolution 

How, then, are we to explain the fact that the concentration of wealth in¬ 
creased steadily in France throughout the nineteenth century and ultimately 
peaked in the Belle Epoque at a level even more extreme than when the Civil 
Code was introduced and scarcely less than in monarchical and aristocratic 
Britain? Clearly, equality of rights and opportunities is not enough to ensure 
an egalitarian distribution of wealth. 

Indeed, once the rate of return on capital significantly and durably ex¬ 
ceeds the growth rate, the dynamics of the accumulation and transmission of 
wealth automatically lead to a very highly concentrated distribution, and egali¬ 
tarian sharing among siblings does not make much of a difference. As I men¬ 
tioned a moment ago, there are always economic and demographic shocks 
that affect the trajectories of individual family fortunes. With the aid of a 
fairly simple mathematical model, one can show that for a given structure of 
shocks of this kind, the distribution of wealth tends toward a long-run equi¬ 
librium and that the equilibrium level of inequality is an increasing function 
of the gap r —^ between the rate of return on capital and the growth rate. In¬ 
tuitively, the difference r—g measures the rate at which capital income diverges 
from average income if none of it is consumed and everything is reinvested in 
the capital stock. The greater the difference r—g, the more powerful the di¬ 
vergent force. If the demographic and economic shocks take a multiplicative 
form (i.e„ the greater the initial capital, the greater the effect of a good or bad 
investment), the long-run equilibrium distribution is a Pareto distribution (a 
mathematical form based on a power law, which corresponds fairly well to 
distributions observed in practice). One can also show fairly easily that the 
coefficient of the Pareto distribution (which measures the degree of inequal¬ 
ity) is a steeply increasing function of the difference r—g. 25 

Concretely, what this means is that if the gap between the return on capi¬ 
tal and the growth rate is as high as that observed in France in the nineteenth 
century, when the average rate of return was 5 percent a year and growth was 
roughly 1 percent, the model predicts that the cumulative dynamics of wealth 
accumulation will automatically give rise to an extremely high concentration 


364 


INEQUALITY OF CAPITAL OWNERSHIP 


of wealth, with typically around 90 percent of capital owned by the top decile 
and more than 50 percent by the top centile. 26 

In other words, the fundamental inequality r> g can explain the very high 
level of capital inequality observed in the nineteenth century, and thus in a 
sense the failure of the French Revolution. Although the revolutionary assem¬ 
blies established a universal tax (and in so doing provided us with a peerless 
instrument for measuring the distribution of wealth), the tax rate was so low 
(barely 1-2 percent on directly transmitted estates, no matter how large, 
throughout the nineteenth century) that it had no measurable impact on the 
difference between the rate of return on capital and the growth rate. Under 
these conditions, it is no surprise that inequality of wealth was as great in 
nineteenth-century France and even during the republican Belle Epoque as in 
monarchical Britain. The formal nature of the regime was of little moment 
compared with the inequality r > g. 

Equipartition of estates between siblings did have some effect, but less than 
the gap r—g. Concretely, primogeniture (or, more precisely, primogeniture on 
agricultural land, which accounted for a decreasing share of British national 
capital over the course of the nineteenth century), magnified the effects of 
demographic and economic shocks (creating additional inequality depending 
on one’s rank in the sibling order) and thus increased the Pareto coefficient 
and gave rise to a more concentrated distribution of wealth. This may help to 
explain why the top decile’s share of total wealth was greater in Britain than 
in France in 1900-1910 (slightly more than 90 percent, compared with slightly 
less in France), and especially why the top centile’s share was significantly 
greater on the British side of the Channel (70 percent v. 60 percent), since this 
appears to have been based on the preservation of a small number of very large 
landed estates. But this effect was partly compensated by France’s low demo¬ 
graphic growth rate (cumulative inequality of wealth is structurally greater 
when the population is stagnant, again because of the difference between r 
and^), and in the end it had only a moderate effect on the overall distribution, 
which was fairly close in the two countries. 27 

In Paris, where the Napoleonic Civil Code came into effect in 1804 and 
where inequality cannot be laid at the door of British aristocrats and the 
queen of England, the top centile owned more than 70 percent of total wealth 
in 1913, even more than in Britain. The reality was so striking that it even 
found expression in an animated cartoon, The Aristocats, set in Paris in 1910. 


365 


THE STRUCTURE OF INEQUALITY 


The size of the old lady’s fortune is not mentioned, but to judge by the splen¬ 
dor of her residence and by the zeal of her butler Edgar to get rid of Duchesse 
and her three kittens, it must have been considerable. 

In terms of the r >g logic, the fact that the growth rate increased from 
barely 0.2 percent prior to 1800 to 0.5 percent in the eighteenth century and 
then to 1 percent in the nineteenth century does not seem to have made much 
of a difference: it was still small compared to a return on capital of around 
5 percent, especially since the Industrial Revolution appears to have slightly 
increased that return. 28 According to the theoretical model, if the return on 
capital is around 5 percent a year, the equilibrium concentration of capital 
will not decrease significantly unless the growth rate exceeds 1.5-2 percent or 
taxes on capital reduce the net return to below 3-3.5 percent, or both. 

Note, finally, that if the difference r—g surpasses a certain threshold, there 
is no equilibrium distribution: inequality of wealth will increase without limit, 
and the gap between the peak of the distribution and the average will grow 
indefinitely. The exact level of this threshold of course depends on savings be¬ 
havior: divergence is more likely to occur if the very wealthy have nothing to 
spend their money on and no choice but to save and add to their capital stock. 
The Aristocats calls attention to the problem: Adelaide de Bonnefamille obvi¬ 
ously enjoys a handsome income, which she lavishes on piano lessons and 
painting classes for Duchesse, Marie, Toulouse, and Berlioz, who are some¬ 
what bored by it all. 29 This kind of behavior explains quite well the rising con¬ 
centration of wealth in France, and particularly in Paris, in the Belle Epoque: 
the largest fortunes increasingly belonged to the elderly, who saved a large frac¬ 
tion of their capital income, so that their capital grew significantly faster than 
the economy. As noted, such an inegalitarian spiral cannot continue indefi¬ 
nitely: ultimately, there will be no place to invest the savings, and the global 
return on capital will fall, until an equilibrium distribution emerges. But that 
can take a very long time, and since the top centile’s share of Parisian wealth in 
1913 already exceeded 70 percent, it is legitimate to ask how high the equilib¬ 
rium level would have been had the shocks due to World War I not occurred. 

Pareto and the Illusion of Stable Inequality 

It is worth pausing a moment to discuss some methodological and historical 
issues concerning the statistical measurement of inequality. In Chapter 7, I 


366 


INEQUALITY OF CAPITAL OWNERSHIP 


discussed the Italian statistician Corrado Gini and his famous coefficient. 
Although the Gini coefficient was intended to sum up inequality in a single 
number, it actually gives a simplistic, overly optimistic, and difficult-to- 
interpret picture of what is really going on. A more interesting case is that of 
Gini’s compatriot Vilfredo Pareto, whose major works, including a discussion 
of the famous “Pareto law,” were published between 1890 and 1910. In the in¬ 
terwar years, the Italian Fascists adopted Pareto as one of their own and pro¬ 
moted his theory of elites. Although they were no doubt seeking to capitalize 
on his prestige, it is nevertheless true that Pareto, shortly before his death in 
1923, hailed Mussolini’s accession to power. Of course the Fascists would 
naturally have been attracted to Pareto’s theory of stable inequality and the 
pointlessness of trying to change it. 

What is more striking when one reads Pareto’s work with the benefit of 
hindsight is that he clearly had no evidence to support his theory of stability. 
Pareto was writing in 1900 or thereabouts. He used available tax tables from 
1880-1890, based on data from Prussia and Saxony as well as several Swiss and 
Italian cities. The information was scanty and covered a decade at most. What 
is more, it showed a slight trend toward higher inequality, which Pareto inten¬ 
tionally sought to hide. 30 In any case, it is clear that such data provide no basis 
whatsoever for any conclusion about the long-term behavior of inequality 
around the world. 

Pareto’s judgment was clearly influenced by his political prejudices: he was 
above all wary of socialists and what he took to be their redistributive illusions. 
In this respect he was hardly different from any number of contemporary col¬ 
leagues, such as the French economist Pierre Leroy-Beaulieu, whom he admired. 
Pareto’s case is interesting because it illustrates the powerful illusion of eter¬ 
nal stability, to which the uncritical use of mathematics in the social sciences 
sometimes leads. Seeking to find out how rapidly the number of taxpayers de¬ 
creases as one climbs higher in the income hierarchy, Pareto discovered that the 
rate of decrease could be approximated by a mathematical law that subsequently 
became known as “Pareto’s law” or, alternatively, as an instance of a general class 
of functions known as “power laws .” 31 Indeed, this family of functions is still 
used today to study distributions of wealth and income. Note, however, that the 
power law applies only to the upper tail of these distributions and that the rela¬ 
tion is only approximate and locally valid. It can nevertheless be used to model 
processes due to multiplicative shocks, like those described earlier. 


367 


THE STRUCTURE OF INEQUALITY 


Note, moreover, that we are speaking not of a single function or curve but 
of a family of functions: everything depends on the coefficients and parame¬ 
ters that define each individual curve. The data collected in the WTID as 
well as the data on wealth presented here show that these Pareto coefficients 
have varied enormously over time. When we say that a distribution of wealth 
is a Pareto distribution, we have not really said anything at all. It may be a 
distribution in which the upper decile receives only slightly more than 20 
percent of total income (as in Scandinavia in 1970-1980) or one in which the 
upper decile receives 50 percent (as in the United States in 2000-2010) or one 
in which the upper decile owns more than 90 percent of total wealth (as in 
France and Britain in 1900-1910). In each case we are dealing with a Pareto 
distribution, but the coefficients are quite different. The corresponding social, 
economic, and political realities are clearly poles apart . 32 

Even today, some people imagine, as Pareto did, that the distribution of 
wealth is rock stable, as if it were somehow a law of nature. In fact, nothing 
could be further from the truth. When we study inequality in historical per¬ 
spective, the important thing to explain is not the stability of the distribution 
but the significant changes that occur from time to time. In the case of the 
wealth distribution, I have identified a way to explain the very large historical 
variations that occur (whether described in terms of Pareto coefficients or as 
shares of the top decile and centile) in terms of the difference r—g between 
the rate of return on capital and the growth rate of the economy. 

Why Inequality of Wealth Has Not Returned 
to the Levels of the Past 

I come now to the essential question: Why has the inequality of wealth not 
returned to the level achieved in the Belle Epoque, and can we be sure that 
this situation is permanent and irreversible? 

Let me state at the outset that I have no definitive and totally satisfactory 
answer to this question. Several factors have played important roles in the 
past and will continue to do so in the future, and it is quite simply impossible 
to achieve mathematical certainty on this point. 

The very substantial reduction in inequality of wealth following the 
shocks of 1914-1945 is the easiest part to explain. Capital suffered a series of 
extremely violent shocks as a result of the wars and the policies to which they 


368 


INEQUALITY OF CAPITAL OWNERSHIP 


gave rise, and the capital/income ratio therefore collapsed. One might of 
course think that the reduction of wealth would have affected all fortunes 
proportionately, regardless of their rank in the hierarchy, leaving the distri¬ 
bution of wealth unchanged. But to believe this one would have to forget the 
fact that wealth has different origins and fulfills different functions. At the 
very top of the hierarchy, most wealth was accumulated long ago, and it takes 
much longer to reconstitute such a large fortune than to accumulate a mod¬ 
est one. 

Furthermore, the largest fortunes serve to finance a certain lifestyle. The 
detailed probate records collected from the archives show unambiguously 
that many rentiers in the interwar years did not reduce expenses sufficiently 
rapidly to compensate for the shocks to their fortunes and income during the 
war and in the decade that followed, so that they eventually had to eat into 
their capital to finance current expenditures. Hence they bequeathed to the 
next generation fortunes significantly smaller than those they had inherited, 
and the previous social equilibrium could no longer be sustained. The Pari¬ 
sian data are particularly eloquent on this point. For example, the wealthiest i 
percent of Parisians in the Belle Fpoque had capital income roughly 80-100 
times as great as the average wage of that time, which enabled them to live 
very well and still reinvest a small portion of their income and thus increase 
their inherited wealth. 33 From 1872 to 1912, the system appears to have been 
perfectly balanced: the wealthiest individuals passed on to the next generation 
enough to finance a lifestyle requiring 80-100 times the average wage or even 
a bit more, so that wealth became even more concentrated. This equilibrium 
clearly broke down in the interwar years: the wealthiest 1 percent of Parisians 
continued to live more or less as they had always done but left the next genera¬ 
tion just enough to yield capital income of 30-40 times the average wage; by 
the late 1930s, this had fallen to just 20 times the average wage. For the rent¬ 
iers, this was the beginning of the end. This was probably the most important 
reason for the deconcentration of wealth that we see in all European coun¬ 
tries (and to a less extent in the United States) in the wake of the shocks of 
1914-1945. 

In addition, the composition of the largest fortunes left them (on average) 
more exposed to losses due to the two world wars. In particular, the probate 
records show that foreign assets made up as a much as a quarter of the largest 
fortunes on the eve of World War I, nearly half of which consisted of the 


369 


THE STRUCTURE OF INEQUALITY 


sovereign debt of foreign governments (especially Russia, which was on the 
verge of default). Unfortunately, we do not have comparable data for Britain, 
but there is no doubt that foreign assets played at least as important a role in 
the largest British fortunes. In both France and Britain, foreign assets virtu¬ 
ally disappeared after the two world wars. 

The importance of this factor should not be overstated, however, since the 
wealthiest individuals were often in a good position to reallocate their portfo¬ 
lios at the most profitable moment. It is also striking to discover that many 
individuals, and not just the wealthiest, owned significant amounts of foreign 
assets on the eve of World War I. When we examine the structure of Parisian 
portfolios in the late nineteenth century and Belle Epoque, we find that they 
were highly diversified and quite “modern” in their composition. On the eve 
of the war, about a third of assets were in real estate (of which approximately 
two-thirds was in Paris and one-third in the provinces, including a small 
amount of agricultural land), while financial assets made up almost two- 
thirds. The latter consisted of both French and foreign stocks and (public as 
well as private) bonds, fairly well balanced at all levels of wealth (see Table 
to.i ). 34 The society of rentiers that flourished in the Belle Epoque was not a 
society of the past based on static landed capital: it embodied a modern atti¬ 
tude toward wealth and investment. But the cumulative inegalitarian logic of 
r >g made it prodigiously and persistently inegalitarian. In such a society, there 
is not much chance that freer, more competitive markets or more secure prop¬ 
erty rights can reduce inequality, since markets were already highly competi¬ 
tive and property rights firmly secured. In fact, the only thing that undermined 
this equilibrium was the series of shocks to capital and its income that began 
with World War I. 

Finally, the period 1914-1945 ended in a number of European countries, 
and especially in France, with a redistribution of wealth that affected the 
largest fortunes disproportionately, especially those consisting largely of 
stock in large industrial firms. Recall, in particular, the nationalization of 
certain companies as a sanction after Liberation (the Renault automobile 
company is the emblematic example), as well as the national solidarity tax, 
which was also imposed in 1945. This progressive tax was a one-time levy 
on both capital and acquisitions made during the Occupation, but the rates 
were extremely high and imposed an additional burden on the individuals 
affected. 35 


370 


TABLE IO.I. 

The composition of Parisian portfolios, 1872-1912 


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Sources'. See piketty.pse.ens.fr/capital: 





THE STRUCTURE OF INEQUALITY 


Some Partial Explanations: Time, Taxes, and Groivth 

In the end, then, it is hardly surprising that the concentration of wealth de¬ 
creased sharply everywhere between 1910 and 1950. In other words, the de¬ 
scending portion of Figures 10.1-5 is not the most difficult part to explain. 
The more surprising part at first glance, and in a way the more interesting 
part, is that the concentration of wealth never recovered from the shocks I 
have been discussing. 

To be sure, it is important to recognize that capital accumulation is a long¬ 
term process extending over several generations. The concentration of wealth 
in Europe during the Belle Epoque was the result of a cumulative process over 
many decades or even centuries. It was not until 1000-2010 that total private 
wealth (in both real estate and financial assets), expressed in years of national 
income, regained roughly the level it had attained on the eve of World War I. 
This restoration of the capital/income ratio in the rich countries is in all prob¬ 
ability a process that is still ongoing. 

It is not very realistic to think that the violent shocks of 1914-1945 could 
have been erased in ten or twenty years, thereby restoring by 1950-1960 a con¬ 
centration of wealth equal to that seen in 1900-1910. Note, too, that inequal¬ 
ity of wealth began to rise again in 1970-1980. It is therefore possible that a 
catch-up process is still under way today, a process even slower than the re¬ 
vival of the capital/income ratio, and that the concentration of wealth will 
soon return to past heights. 

In other words, the reason why wealth today is not as unequally distributed 
as in the past is simply that not enough time has passed since 1945. This is no 
doubt part of the explanation, but by itself it is not enough. When we look at 
the top decile’s share of wealth and even more at the top centile’s (which was 
60-70 percent across Europe in 1910 and only 10-30 percent in 2010), it seems 
clear that the shocks of 1914-1945 caused a structural change that is preventing 
wealth from becoming quite as concentrated as it was previously. The point is 
not simply quantitative—far from it. In the next chapter, we will see that when 
we look again at the question raised by Vautrin’s lecture on the different stan¬ 
dards of living that can be attained by inheritance and labor, the difference 
between a 60-70 percent share for the top centile and a 20-30 percent share is 
relatively simple. In the first case, the top centile of the income hierarchy is very 
clearly dominated by top capital incomes: this is the society of rentiers familiar 


372 


INEQUALITY OF CAPITAL OWNERSHIP 


to nineteenth-century novelists. In the second case, top earned incomes (for a 
given distribution) roughly balance top capital incomes (we are now in a soci¬ 
ety of managers, or at any rate a more balanced society). Similarly, the emer¬ 
gence of a “patrimonial middle class” owning between a quarter and a third of 
national wealth rather than a tenth or a twentieth (scarcely more than the 
poorest half of society) represents a major social transformation. 

What structural changes occurred between 1914 and 1945, and more gen¬ 
erally during the twentieth century, that are preventing the concentration of 
wealth from regaining its previous heights, even though private wealth overall 
is prospering almost as handsomely today as in the past? The most natural and 
important explanation is that governments in the twentieth century began 
taxing capital and its income at significant rates. It is important to notice that 
the very high concentration of wealth observed in 1900-1910 was the result of 
a long period without a major war or catastrophe (at least when compared to 
the extreme violence of twentieth-century conflicts) as well as without, or al¬ 
most without, taxes. Until World War I there was no tax on capital income or 
corporate profits. In the rare cases in which such taxes did exist, they were 
assessed at very low rates. Hence conditions were ideal for the accumulation 
and transmission of considerable fortunes and for living on the income of 
those fortunes. In the twentieth century, taxes of various kinds were imposed 
on dividends, interest, profits, and rents, and this changed things radically. 

To simplify matters: assume initially that capital income was taxed at an 
average rate close to o percent (and in any case less than 5 percent) before 
1900-1910 and at about 30 percent in the rich countries in 1950-1980 (and to 
some extent until 2000-2010, although the recent trend has been clearly down¬ 
ward as governments engage in fiscal competition spearheaded by smaller 
countries). An average tax rate of 30 percent reduces a pretax return of 5 per¬ 
cent to a net return of 3.5 percent after taxes. This in itself is enough to have 
significant long-term effects, given the multiplicative and cumulative logic of 
capital accumulation and concentration. Using the theoretical models de¬ 
scribed above, one can show that an effective tax rate of 30 percent, if applied 
to all forms of capital, can by itself account for a very significant deconcentra¬ 
tion of wealth (roughly equal to the decrease in the top centile’s share that we 
see in the historical data). 36 

In this context, it is important to note that the effect of the tax on capital 
income is not to reduce the total accumulation of wealth but to modify the 


373 


THE STRUCTURE OF INEQUALITY 


structure of the wealth distribution over the long run. In terms of the theo¬ 
retical model, as well as in the historical data, an increase in the tax on capital 
income from o to 30 percent (reducing the net return on capital from 5 to 3.5 
percent) may well leave the total stock of capital unchanged over the long run 
for the simple reason that the decrease in the upper centile’s share of wealth is 
compensated by the rise of the middle class. This is precisely what happened 
in the twentieth century—although the lesson is sometimes forgotten today. 

It is also important to note the rise of progressive taxes in the twentieth 
century, that is, of taxes that imposed higher rates on top incomes and espe¬ 
cially top capital incomes (at least until 1970-1980), alongwith estate taxes on 
the largest estates. In the nineteenth century, estate tax rates were extremely 
low, no more than 1-2 percent on bequests from parents to children. A tax of 
this sort obviously has no discernible effect on the process of capital accumu¬ 
lation. It is not so much a tax as a registration fee intended to protect property 
rights. The estate tax became progressive in France in 1901, but the highest 
rate on direct-line bequests was no more than 5 percent (and applied to at 
most a few dozen bequests a year). A rate of this magnitude, assessed once a 
generation, cannot have much effect on the concentration of wealth, no mat¬ 
ter what wealthy individuals thought at the time. Quite different in their ef¬ 
fect were the rates of 20-30 percent or higher that were imposed in most 
wealthy countries in the wake of the military, economic, and political shocks 
of 1914-1945. The upshot of such taxes was that each successive generation 
had to reduce its expenditures and save more (or else make particularly profit¬ 
able investments) if the family fortune was to grow as rapidly as average in¬ 
come. Hence it became more and more difficult to maintain one’s rank. Con¬ 
versely, it became easier for those who started at the bottom to make their 
way, for instance by buying businesses or shares sold when estates went to pro¬ 
bate. Simple simulations show that a progressive estate tax can greatly reduce 
the top centile’s share of wealth over the long run . 37 The differences between 
estate tax regimes in different countries can also help to explain international 
differences. For example, why have top capital incomes in Germany been more 
concentrated than in France since World War II, suggesting a higher concentra¬ 
tion of wealth? Perhaps because the highest estate tax rate in Germany is no 
more than 15-20 percent, compared with 30-40 percent in France . 38 

Both theoretical arguments and numerical simulations suggest that taxes 
suffice to explain most of the observed evolutions, even without invoking 


374 


INEQUALITY OF CAPITAL OWNERSHIP 


structural transformations. It is worth reiterating that the concentration of 
wealth today, though markedly lower than in 1900-1910, remains extremely 
high. It does not require a perfect, ideal tax system to achieve such a result or 
to explain a transformation whose magnitude should not be exaggerated. 

The Twenty-First Century: Even More 
Inegalitarian Than the Nineteenth? 

Given the many mechanisms in play and the multiple uncertainties involved 
in tax simulations, it would nevertheless be going too far to conclude that no 
other factors played a significant role. My analysis thus far has shown that two 
factors probably did play an important part, independent of changes in the 
tax system, and will continue to do so in the future. The first is the probable 
slight decrease in capital’s share of income and in the rate of return on capital 
over the long run, and the second is that the rate of growth, despite a likely 
slowing in the twenty-first century, will be greater than the extremely low rate 
observed throughout most of human history up to the eighteenth century. 
(Here I am speaking of the purely economic component of growth, that is, 
growth of productivity, which reflects the growth of knowledge and techno¬ 
logical innovation.) Concretely, as Figure 10.11 shows, it is likely that the 
difference r>g will be smaller in the future than it was before the eighteenth 
century, both because the return on capital will be lower (4-4.5 percent, say, 
rather than 4.5-5 percent) and growth will be higher (1-1.5 percent rather 
than o.i-o.i percent), even if competition between states leads to the elimi¬ 
nation of all taxes on capital. If theoretical simulations are to be believed, the 
concentration of wealth, even if taxes on capital are abolished, would not 
necessarily return to the extreme level of 1900-1910. 

There are no grounds for rejoicing, however, in part because inequality of 
wealth would still increase substantially (halving the middle-class share of 
national wealth, for example, which voters might well find unacceptable) and 
in part because there is considerable uncertainty in the simulations, and other 
forces exist that may well push in the opposite direction, that is, toward an 
even greater concentration of capital than in 1900-1910. In particular, demo¬ 
graphic growth may be negative (which could drive growth rates, especially in 
the wealthy countries, below those observed in the nineteenth century, and 
this would in turn give unprecedented importance to inherited wealth). In 


375 


THE STRUCTURE OF INEQUALITY 


addition, capital markets may become more and more sophisticated and more 
and more “perfect” in the sense used by economists (meaning that the return 
on capital will become increasingly disconnected from the individual charac¬ 
teristics of the owner and therefore cut against meritocratic values, reinforc¬ 
ing the logic of r>g). As I will show later, in addition, financial globalization 
seems to be increasing the correlation between the return on capital and the 
initial size of the investment portfolio, creating an inequality of returns that 
acts as an additional—and quite worrisome—force for divergence in the global 
wealth distribution. 

To sum up: the fact that wealth is noticeably less concentrated in Europe 
today than it was in the Belle Epoque is largely a consequence of accidental 
events (the shocks of 1914-1945) and specific institutions such as taxation of 
capital and its income. If those institutions were ultimately destroyed, there 
would be a high risk of seeing inequalities of wealth close to those observed in 
the past or, under certain conditions, even higher. Nothing is certain: ine¬ 
quality can move in either direction. Hence I must now look more closely at 
the dynamics of inheritance and then at the global dynamics of wealth. One 
conclusion is already quite clear, however: it is an illusion to think that some¬ 
thing about the nature of modern growth or the laws of the market economy 
ensures that inequality of wealth will decrease and harmonious stability will 
be achieved. 


376 


{ ELEVEN } 


Merit and Inheritance in the Long Run 


The overall importance of capital today, as noted, is not very different from 
what it was in the eighteenth century. Only its form has changed: capital was 
once mainly land but is now industrial, financial, and real estate. We also 
know that the concentration of wealth remains high, although it is noticeably 
less extreme than it was a century ago. The poorest half of the population still 
owns nothing, but there is now a patrimonial middle class that owns between 
a quarter and a third of total wealth, and the wealthiest to percent now own 
only two-thirds of what there is to own rather than nine-tenths. We have also 
learned that the relative movements of the return on capital and the rate of 
growth of the economy, and therefore of the difference between them, r—g, 
can explain many of the observed changes, including the logic of accumula¬ 
tion that accounts for the very high concentration of wealth that we see 
throughout much of human history. 

In order to understand this cumulative logic better, we must now take a 
closer look at the long-term evolution of the relative roles of inheritance and 
saving in capital formation. This is a crucial issue, because a given level of capi¬ 
tal concentration can come about in totally different ways. It may be that the 
global level of capital has remained the same but that its deep structure has 
changed dramatically, in the sense that capital was once largely inherited but 
is now accumulated over the course of a lifetime by savings from earned in¬ 
come. One possible explanation for such a change might be increased life ex¬ 
pectancy, which might have led to a structural increase in the accumulation 
of capital in anticipation of retirement. However, this supposed great transfor¬ 
mation in the nature of capital was actually less dramatic than is sometimes 
thought; indeed, in some countries it did not occur at all. In all likelihood, 
inheritance will again play a significant role in the twenty-first century, com¬ 
parable to its role in the past. 

More precisely, I will come to the following conclusion. Whenever the 
rate of return on capital is significantly and durably higher than the growth 


377 


THE STRUCTURE OF INEQUALITY 


rate of the economy, it is all but inevitable that inheritance (of fortunes accu¬ 
mulated in the past) predominates over saving (wealth accumulated in the 
present). In strict logic, it could be otherwise, but the forces pushing in this 
direction are extremely powerful. The inequality r>g in one sense implies 
that the past tends to devour the future: wealth originating in the past auto¬ 
matically grows more rapidly, even without labor, than wealth stemming 
from work, which can be saved. Almost inevitably, this tends to give lasting, 
disproportionate importance to inequalities created in the past, and therefore 
to inheritance. 

If the twenty-first century turns out to be a time of low (demographic and 
economic) growth and high return on capital (in a context of heightened in¬ 
ternational competition for capital resources), or at any rate in countries 
where these conditions hold true, inheritance will therefore probably again be 
as important as it was in the nineteenth century. An evolution in this direc¬ 
tion is already apparent in France and a number of other European countries, 
where growth has already slowed considerably in recent decades. For the 
moment it is less prominent in the United States, essentially because demo¬ 
graphic growth there is higher than in Europe. But if growth ultimately slows 
more or less everywhere in the coming century, as the median demographic 
forecasts by the United Nations (corroborated by other economic forecasts) 
suggest it will, then inheritance will probably take on increased importance 
throughout the world. 

This does not imply, however, that the structure of inequality in the 
twenty-first century will be the same as in the nineteenth century, in part 
because the concentration of wealth is less extreme (there will probably be 
more small to medium rentiers and fewer extremely wealthy rentiers, at least 
in the short term), in part because the earned income hierarchy is expanding 
(with the rise of the supermanager), and finally because wealth and income 
are more strongly correlated than in the past. In the twenty-first century it is 
possible to be both a supermanager and a “medium rentier”: the new merito¬ 
cratic order encourages this sort of thing, probably to the detriment of low- 
and medium-wage workers, especially those who own only a tiny amount of 
property, if any. 


378 


MERIT AND INHERITANCE IN THE LONG RUN 


Inheritance Floivs over the Long Run 

I will begin at the beginning. In all societies, there are two main ways of ac¬ 
cumulating wealth: through work or inheritance. 1 How common is each of 
these in the top centiles and deciles of the wealth hierarchy? This is the key 
question. 

In Vautrin’s lecture to Rastignac (discussed in Chapter 7), the answer is 
clear: study and work cannot possibly lead to a comfortable and elegant life, 
and the only realistic strategy is to marry Mademoiselle Victorine and her 
inheritance. One of my primary goals in this work is to find out how closely 
nineteenth-century French society resembled the society described by Vau- 
trin and above all to learn how and why this type of society evolved over time. 

It is useful to begin by examining the evolution of the annual flow of in¬ 
heritances over the long run, that is, the total value of bequests (and gifts be¬ 
tween living individuals) during the course of a year, expressed as a percentage 
of national income. This figure measures the annual amount of past wealth 
conveyed each year relative to the total income earned that year. (Recall that 
earned income accounts for roughly two-thirds of national income each year, 
while part of capital income goes to remunerate the capital that is passed on 
to heirs.) 

I will examine the French case, which is by far the best known over the 
long run, and the pattern I find there, it turns out, also applies to a certain 
extent to other European countries. Finally, I will explore what it is possible 
to say at the global level. 

Figure 11.1 represents the evolution of the annual inheritance flow in France 
from 1820 to 2010. 2 Two facts stand out clearly. First, the inheritance flow ac¬ 
counts for 20-25 percent of annual income every year in the nineteenth cen¬ 
tury, with a slight upward trend toward the end of the century. This is an ex¬ 
tremely high flow, as I will show later, and it reflects the fact that nearly all of 
the capital stock came from inheritance. If inherited wealth is omnipresent in 
nineteenth-century novels, it was not only because writers, especially the 
debt-ridden Balzac, were obsessed by it. It was above all because inheritance 
occupied a structurally central place in nineteenth-century society—central 
as both economic flow and social force. Its importance did not diminish with 
time, moreover. On the contrary, in 1900-1910, the flow of inheritance was 
somewhat higher (25 percent of national income compared with barely 20) 


379 


Annual value of inheritance and gifts 
(% national income) 


THE STRUCTURE OF INEQUALITY 



figure ii.i. The annual inheritance flow as a fraction of national income, France, 
1820-2010 

The annual inheritance flow was about 20-25 percent of national income during the 
nineteenth century and until 1914; it then fell to less than 5 percent in the 1950s, and 
returned to about 15 percent in 2010. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


than it had been in the 1820s, the period of Vautrin, Rastignac, and the Vau- 
quer boardinghouse. 

Subsequently, we find a spectacular decrease in the flow of inheritances 
between 1910 and 1950 followed by a steady rebound thereafter, with an ac¬ 
celeration in the 1980s. There were very large upward and downward varia¬ 
tions during the twentieth century. The annual flow of inheritances and gifts 
was (to a first approximation, and compared with subsequent shocks) rela¬ 
tively stable until World War I but fell by a factor of 5 or 6 between 1910 and 
1950 (when the inheritance flow was barely 4 or 5 percent of national income), 
after which it increased by a factor of 3 or 4 between 1950 and 2010 (at which 
time the flow accounted for 15 percent of national income). 

The evolution visible in Figure 11.1 reflects deep changes in the perception 
as well as the reality of inheritance, and to a large extent it also reflects changes 
in the structure of inequality. As we will soon see, the compression of the in¬ 
heritance flow owing to the shocks of 1914-1945 was nearly twice as great as 
the decrease in private wealth. The inheritance collapse was therefore not 


380 

































MERIT AND INHERITANCE IN THE LONG RUN 


simply the result of a wealth collapse (even if the two developments are obvi¬ 
ously closely related). In the public mind, the idea that the age of inheritance 
was over was certainly even more influential than the idea of an end of capi¬ 
talism. In 1950-1960, bequests and gifts accounted for just a few points of 
national income, so it was reasonable to think that inheritances had virtually 
disappeared and that capital, though less important overall than in the past, 
was now wealth that an individual accumulated by effort and saving during 
his or her lifetime. Several generations grew up under these conditions (even 
if perceptions somewhat exceeded reality), in particular the baby boom gen¬ 
eration, born in the late 1940s and early 1950s, many of whom are still alive 
today, and it was natural for them to assume that this was the “new normal.” 

Conversely, younger people, in particular those born in the 1970s and 
1980s, have already experienced (to a certain extent) the important role that 
inheritance will once again play in their lives and the lives of their relatives 
and friends. For this group, for example, whether or not a child receives gifts 
from parents can have a major impact in deciding who will own property and 
who will not, at what age, and how extensive that property will be—in any 
case, to a much greater extent than in the previous generation. Inheritance is 
playing a larger part in their lives, careers, and individual and family choices 
than it did with the baby boomers. The rebound of inheritance is still incom¬ 
plete, however, and the evolution is still under way (the inheritance flow in 
2000-2010 stood at a point roughly midway between the nadir of the 1950s 
and the peak of 1900-1910). To date, it has had a less profound impact on per¬ 
ceptions than the previous change, which still dominates people’s thinking. A 
few decades from now, things may be very different. 

Fiscal Flow and Economic Flow 

Several points about Figure 11.1 need to be clarified. First, it is essential to in¬ 
clude gifts between living individuals (whether shortly before death or earlier 
in life) in the flow of inheritance, because this form of transmission has al¬ 
ways played a very important role in France and elsewhere. The relative mag¬ 
nitude of gifts and bequests has varied greatly over time, so omitting gifts would 
seriously bias the analysis and distort spatial and temporal comparisons. For¬ 
tunately, gifts in France are carefully recorded (though no doubt somewhat 
underestimated). This is not the case everywhere. 


381 


THE STRUCTURE OF INEQUALITY 


Second, and even more important, the wealth of French historical sources 
allows us to calculate inheritance flows in two different ways, using data and 
methods that are totally independent. What we find is that the two evolutions 
shown in Figure ii.i (which I have labeled “fiscal flow” and “economic flow”) 
are highly consistent, which is reassuring and demonstrates the robustness of 
the historical data. This consistency also helps us to decompose and analyze 
the various forces at work. 3 

Broadly speaking, there are two ways to estimate inheritance flows in a 
particular country. One can make direct use of observed flows of inheri¬ 
tances and gifts (for example, by using tax data: this is what I call the “fiscal 
flow”). Or one can look at the private capital stock and calculate the theo¬ 
retical flow that must have occurred in a given year (which I call the “eco¬ 
nomic flow”). Each method has its advantages and disadvantages. The first 
method is more direct, but the tax data in many countries are so incomplete 
that the results are not always satisfactory. In France, as noted previously, 
the system for recording bequests and gifts was established exceptionally 
early (at the time of the Revolution) and is unusually comprehensive (in 
theory it covers all transmissions, including those on which little or no tax 
is paid, though there are some exceptions), so the fiscal method can be ap¬ 
plied. The tax data must be corrected, however, to take account of small 
bequests that do not have to be declared (the amounts involved are insig¬ 
nificant) and above all to correct for certain assets that are exempt from the 
estate tax, such as life insurance contracts, which have become increasingly 
common since 1970 (and today account for nearly one-sixth of total private 
wealth in France). 

The second method (“economic flow”) has the advantage of not relying on 
tax data and therefore giving a more complete picture of the transmission of 
wealth, independent of the vagaries of different countries’ tax systems. The 
ideal is to be able to use both methods in the same country. What is more, one 
can interpret the gap between the two curves in Figure 11.1 (which shows that 
the economic flow is always a little greater than the fiscal flow) as an estimate 
of tax fraud or deficiencies of the probate record-keeping system. There may 
also be other reasons for the gap, including the many imperfections in the 
available data sets and the methods used. For certain subperiods, the gap is far 
from negligible. The long-run evolutions in which I am primarily interested 
are nevertheless quite consistent, regardless of which method we use. 


382 


MERIT AND INHERITANCE IN THE LONG RUN 


The Three Forces: The Illusion of an End of Inheritance 

In fact, the main advantage of the economic flow approach is that it requires 
us to take a comprehensive view of the three forces that everywhere determine 
the flow of inheritance and its historical evolution. 

In general, the annual economic flow of inheritances and gifts, expressed 
as a proportion of national income that we denote b , is equal to the product of 
three forces: 

b y — \XXmX ( 3 , 

where (3 is the capital/income ratio (or, more precisely, the ratio of total pri¬ 
vate wealth, which, unlike public assets, can be passed on by inheritance, to 
national income), m is the mortality rate, and p is the ratio of average wealth 
at time of death to average wealth of living individuals. 

This decomposition is a pure accounting identity: by definition, it is al¬ 
ways true in all times and places. In particular, this is the formula I used to 
estimate the economic flow depicted in Figure ii.i. Although this decomposi¬ 
tion of the economic flow into three forces is a tautology, I think it is a useful 
tautology in that it enables us to clarify an issue that has been the source of 
much confusion in the past, even though the underlying logic is not terribly 
complex. 

Let me examine the three forces one by one. The first is the capital/income 
ratio ( 3 . This force expresses a truism: if the flow of inherited wealth is to be 
high in a given society, the total stock of private wealth capable of being in¬ 
herited must also be large. 

The second force, the mortality rate m, describes an equally transparent 
mechanism. All other things being equal, the higher the mortality rate, the 
higher the inheritance flow. In a society where everyone lives forever, so that 
the mortality rate is exactly zero, inheritance must vanish. The inheritance 
flow b must also be zero, no matter how large the capital/income ratio (3 is. 

The third force, the ratio p of average wealth at time of death to average 
wealth of living individuals, is equally transparent. 4 

Suppose that the average wealth at time of death is the same as the average 
wealth of the population as a whole. Then p = i, and the inheritance flow b is 
simply the product of the mortality rate m and the capital/income ratio ( 3 . For 


383 


THE STRUCTURE OF INEQUALITY 


example, if the capital/income ratio is 600 percent (that is, the stock of pri¬ 
vate wealth represents six years of national income) and the mortality rate of 
the adult population is 2 percent, 5 then the annual inheritance flow will auto¬ 
matically be 12 percent of national income. 

If average wealth at time of death is twice the average wealth of the living, 
so that p= 2, then the inheritance flow will be 24 percent of national income 
(assuming (3 = 6 and m — 2 percent), which is approximately the level observed 
in the nineteenth and early twentieth centuries. 

Clearly, p depends on the age profile of wealth. The more wealth increases 
with age, the higher p will be and therefore the larger the inheritance flow. 

Conversely, in a society where the primary purpose of wealth is to finance 
retirement and elderly individuals consume the capital accumulated during 
their working lives in their years of retirement (by drawing down savings in a 
pension fund, for example), in accordance with the “life-cycle theory of 
wealth” developed by the Italian-American economist Franco Modigliani in 
the 1950s, then by construction p will be almost zero, since everyone aims to 
die with little or no capital. In the extreme case p=o, inheritance vanishes 
regardless of the values of (3 and m. In strictly logical terms, it is perfectly pos¬ 
sible to imagine a world in which there is considerable private capital (so (3 is 
very high) but most wealth is in pension funds or equivalent forms of wealth 
that vanish at death (“annuitized wealth”), so that the inheritance flow is zero 
or close to it. Modigliani’s theory offers a tranquil, one-dimensional view of 
social inequality: inequalities of wealth are nothing more than a translation 
in time of inequalities with respect to work. (Managers accumulate more re¬ 
tirement savings than workers, but both groups consume all their capital by 
the time they die.) This theory was quite popular in the decades after World 
War II, when functionalist American sociology, exemplified by the work of 
Talcott Parsons, also depicted a middle-class society of managers in which 
inherited wealth played virtually no role. 6 It is still quite popular today among 
baby boomers. 

Our decomposition of the inheritance flow as the product of three forces 
(by — p X m X ( 3 ) is important for thinking historically about inheritance and 
its evolution, for each of the three forces embodies a significant set of beliefs 
and arguments (perfectly plausible a priori) that led many people to imagine, 
especially during the optimistic decades after World War II, that the end (or 
at any rate gradual and progressive decrease) of inherited wealth was some- 


384 


MERIT AND INHERITANCE IN THE LONG RUN 


how the logical and natural culmination of history. However, such a gradual 
end to inherited wealth is by no means inevitable, as the French case clearly 
illustrates. Indeed, the U-shaped curve we see in France is a consequence of 
three U-shaped curves describing each of the three forces, p, m, and ( 3 . Fur¬ 
thermore, the three forces acted simultaneously, in part for accidental rea¬ 
sons, and this explains the large amplitude of the overall change, and in par¬ 
ticular the exceptionally low level of inheritance flow in 1950-1960, which led 
many people to believe that inherited wealth had virtually disappeared. 

In Part Two I showed that the capital/income ratio (3 was indeed de¬ 
scribed by a U-shaped curve. The optimistic belief associated with this first 
force is quite clear and at first sight perfectly plausible: inherited wealth has 
tended over time to lose its importance simply because wealth has lost its im¬ 
portance (or, more precisely, wealth in the sense of nonhuman capital, that is, 
wealth that can be owned, exchanged on a market, and fully transmitted to 
heirs under the prevailing laws of property). There is no logical reason why 
this optimistic belief cannot be correct, and it permeates the whole modern 
theory of human capital (including the work of Gary Becker), even if it is not 
always explicitly formulated. 7 However, things did not unfold this way, or at 
any rate not to the degree that people sometimes imagine: landed capital be¬ 
came financial and industrial capital and real estate but retained its overall 
importance, as can be seen in the fact that the capital/income ratio seems to 
be about to regain the record level attained in the Belle Fpoque and earlier. 

For partly technological reasons, capital still plays a central role in produc¬ 
tion today, and therefore in social life. Before production can begin, funds are 
needed for equipment and office space, to finance material and immaterial 
investments of all kinds, and of course to pay for housing. To be sure, the level 
of human skill and competence has increased over time, but the importance 
of nonhuman capital has increased proportionately. Hence there is no obvi¬ 
ous a priori reason to expect the gradual disappearance of inherited wealth on 
these grounds. 


Mortality over the Long Run 

The second force that might explain the natural end of inheritance is in¬ 
creased life expectancy, which lowers the mortality rate m and increases the 
time to inheritance (which decreases the size of the legacy). Indeed, there is 


385 


Adult mortality rate (%) 


THE STRUCTURE OF INEQUALITY 



figure ii.i. The mortality rate in France, 1820-2100 

The mortality rate fell in France during the twentieth century (rise of life expectancy), 
and should increase somewhat during the twenty-first century (baby-boom effect). 
Sources and series: see piketty.pse.ens.fr/capital21c. 

no doubt that the mortality rate has decreased over the long run: the propor¬ 
tion of the population that dies each year is smaller when the life expectancy 
is eighty than when it is sixty. Other things being equal, for a given (3 and p, a 
society with a lower mortality rate is also a society in which the flow of inheri¬ 
tance is a smaller proportion of national income. In France, the mortality rate 
has declined inexorably over the course of history, and the same is true of 
other countries. The French mortality rate was around 2.2 percent (of the 
adult population) in the nineteenth century but declined steadily throughout 
the twentieth century, 8 dropping to 1.1-1.2 percent in 2000-2010, a decrease 
of almost one-half in a century (see Figure 11.2). 

It would be a serious mistake, however, to think that changes in the 
mortality rate lead inevitably to the disappearance of inherited wealth as a 
major factor in the economy. For one thing, the mortality rate began to rise 
again in France in 2000-2010, and according to official demographic fore¬ 
casts this increase is likely to continue until 2040-2050, after which adult 
mortality should stabilize at around 1.4-1.5 percent. The explanation for 
this is that the baby boomers, who outnumber previous cohorts (but are 
about the same size as subsequent ones), will reach the end of their life 


386 









































MERIT AND INHERITANCE IN THE LONG RUN 


spans in this period. 9 In other words, the baby boom, which led to a struc¬ 
tural increase in the size of birth cohorts, temporarily reduced the mortal¬ 
ity rate simply because the population grew younger and larger. French de¬ 
mographics are fortunately quite simple, so that it is possible to present the 
principal effects of demographic change in a clear manner. In the nine¬ 
teenth century, the population was virtually stationary, and life expectancy 
was about sixty years, so that the average person enjoyed a little over forty 
years of adulthood, and the mortality rate was therefore close to 1/40, or 
actually about 2.2 percent. In the twenty-first century, the population, ac¬ 
cording to official forecasts, will likely stabilize again, with a life expectancy 
of about eighty-five years, or about sixty-five years of adult life, giving a 
mortality rate of about 1/65 in a static population, which translates into 
1.4-1.5 percent when we allow for slight demographic growth. Over the long 
run, in a developed country with a quasi-stagnant population like France 
(where population increase is primarily due to aging), the decrease in the 
adult mortality rate is about one-third. 

The anticipated increase in the mortality rate between 2000-2010 and 
2040-2050 due to the aging of the baby boom generation is admittedly a 
purely mathematical effect, but it is nevertheless important. It partly ex¬ 
plains the low inheritance flows of the second half of the twentieth century, 
as well as the expected sharp increase in these flows in the decades to come. 
This effect will be even stronger elsewhere. In countries where the popula¬ 
tion has begun to decrease significantly or will soon do so (owing to a de¬ 
crease in cohort size)—most notably Germany, Italy, Spain, and of course 
Japan—this phenomenon will lead to a much larger increase in the adult 
mortality rate in the first half of the twenty-first century and thus automati¬ 
cally increase inheritance flows by a considerable amount. People may live 
longer, but they still die eventually; only a significant and steady increase in 
cohort size can permanently reduce the mortality rate and inheritance flow. 
When an aging population is combined with a stabilization of cohort size as 
in France, however, or even a reduced cohort size as in a number of rich 
countries, very high inheritance flows are possible. In the extreme case—a 
country in which the cohort size is reduced by half (because each couple de¬ 
cides to have only one child), the mortality rate, and therefore the inheri¬ 
tance flow, could rise to unprecedented levels. Conversely, in a country where 
the size of each age cohort doubles every generation, as happened in many 


387 


THE STRUCTURE OF INEQUALITY 


countries in the twentieth century and is still happening in Africa, the 
mortality rate declines to very low levels, and inherited wealth counts for 
little (other things equal). 

Wealth Ages ivith Population: The jU X rn Effect 

Let us now forget the effects of variations in cohort size: though important, 
they are essentially transitory, unless we imagine that in the long run the 
population of the planet grows infinitely large or infinitely small. Instead, I 
will adopt the very long-run perspective and assume that cohort size is sta¬ 
ble. How does increased life expectancy really affect the importance of inher¬ 
ited wealth? To be sure, a longer life expectancy translates into a structural 
decrease in the mortality rate. In France, where the average life expectancy in 
the twenty-first century will be eight to eighty-five years, the adult mortality 
rate will stabilize at less than 1.5 percent a year, compared with 1.1 percent in 
the nineteenth century, when the life expectancy was just over sixty. The in¬ 
crease in the average age of death inevitably gives rise to a similar increase in 
the average age of heirs at the moment of inheritance. In the nineteenth cen¬ 
tury, the average age of inheritance was just thirty; in the twenty-first century 
it will be somewhere around fifty. As Figure 11.3 shows, the difference be¬ 
tween the average age of death and the average age of inheritance has always 
been around thirty years, for the simple reason that the average age of child¬ 
birth (often referred to as “generational duration”) has been relatively stable at 
around thirty over the long run (although there has been a slight increase in 
the early twenty-first century). 

But does the fact that people die later and inherit later imply that inher¬ 
ited wealth is losing its importance? Not necessarily, in part because the grow¬ 
ing importance of gifts between living individuals has partly compensated for 
this aging effect, and in part because it may be that people are inheriting later 
but receiving larger amounts, since wealth tends to age in an aging society. In 
other words, the downward trend in the mortality rate—ineluctable in the 
very long run—can be compensated by a similar structural increase in the 
relative wealth of older people, so that the product \iXm remains unchanged 
or in any case falls much more slowly than some have believed. This is pre¬ 
cisely what happened in France: the ratio p of average wealth at death to aver- 


388 


MERIT AND INHERITANCE IN THE LONG RUN 



figure 11.3. Average age of decedents and inheritors: France, 1820-2100 
The average of (adult) decedents rose from less than 60 years to almost 80 years during 
the twentieth century, and the average age at the time of inheritance rose from 30 years 
to 50 years. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


age wealth of the living rose sharply after 1950-1960, and this gradual aging of 
wealth explains much of the increased importance of inherited wealth in re¬ 
cent decades. 

Concretely, one finds that the product p Xb, which by definition mea¬ 
sures the annual rate of transmission by inheritance (or, in other words, the 
inheritance flow expressed as a percentage of total private wealth), clearly be¬ 
gan to rise over the past few decades, despite the continuing decrease in the 
morality rate, as Figure 11.4 shows. The annual rate of transmission by inheri¬ 
tance, which nineteenth-century economists called the “rate of estate devolu¬ 
tion,” was according to my sources relatively stable from the 1820s to the 1910s 
at around 3.3-3.5 percent, or roughly 1/30. It was also said in those days that a 
fortune was inherited on average once every thirty years, that is, once a gen¬ 
eration, which is a somewhat too static view of things but partially justified by 
the reality of the time. 10 The transmission rate decreased sharply in the period 
1910-1950 and in the 1950s stood at about 2 percent, before rising steadily to 
above 2.5 percent in 2000-2010. 


389 



















































Annual rate of transmission or mortality (%) 


THE STRUCTURE OF INEQUALITY 



FIGURE ii.4. Inheritance flow versus mortality rate: France, 1820-2010 

The annual flow of inheritance (bequests and gifts) is equal to about 2.5 percent of ag¬ 
gregate wealth in 2000-2010 versus 1.2 percent for the mortality rate. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


To sum up: inheritance occurs later in aging societies, but wealth also 
ages, and the latter tends to compensate the former. In this sense, a society in 
which people die older is very different from a society in which they don’t die 
at all and inheritance effectively vanishes. Increased life expectancy delays 
important life events: people study longer, start work later, inherit later, retire 
later, and die later. But the relative importance of inherited wealth as opposed 
to earned income does not necessarily change, or at any rate changes much 
less than people sometimes imagine. To be sure, inheriting later in life may 
make choosing a profession more frequently necessary than in the past. But 
this is compensated by the inheritance of larger amounts or by the receipt of 
gifts. In any case, the difference is more one of degree than the dramatic 
change of civilization that is sometimes imagined. 


Wealth of the Dead, Wealth of the Living 

It is interesting to take a closer look at the evolution of p, the ratio between 
average wealth at death and average wealth of the living, which I have pre- 


390 




























Ratio between the average wealth of 
decedents and the living 


MERIT AND INHERITANCE IN THE LONG RUN 



figure 11.5. The ratio between average wealth at death and average wealth of the liv¬ 
ing: France, 1820-2010 

In 2000-2010, the average wealth at death is 20 percent higher than that of the living 
if one omits the gifts that were made before death, but more than twice as large if one 
re-integrates gifts. 

Sources and series: see piketty.pse.ens.fr/capital21c. 

sented in Figure 11.5. Note, first, that over the course of the past two centu¬ 
ries, front 1820 to the present, the dead have always been (on average) 
wealthier than the living in France: p has always been greater than 100 
percent, except in the period around World War II (1940-1950), when the 
ratio (without correcting for gifts made prior to death) fell to just below 100 
percent. Recall that according to Modigliani’s life-cycle theory, the primary 
reason for amassing wealth, especially in aging societies, is to pay for retire¬ 
ment, so that older individuals should consume most of their savings dur¬ 
ing old age and should therefore die with little or no wealth. This is the fa¬ 
mous “Modigliani triangle,” taught to all students of economics, according 
to which wealth at first increases with age as individuals accumulate savings 
in anticipation of retirement and then decreases. The ratio p should there¬ 
fore be equal to zero or close to it, in any case much less than 100 percent. 
But this theory of capital and its evolution in advanced societies, which is 
perfectly plausible a priori, cannot explain the observed facts—to put it 
mildly. Clearly, saving for retirement is only one of many reasons—and not 
the most important reason—why people accumulate wealth: the desire to 


391 









































THE STRUCTURE OF INEQUALITY 


perpetuate the family fortune has always played a central role. In practice, 
the various forms of annuitized wealth, which cannot be passed on to de¬ 
scendants, account for less than 5 percent of private wealth in France and at 
most 15-20 percent in the English-speaking countries, where pension funds 
are more developed. This is not a negligible amount, but it is not enough to 
alter the fundamental importance of inheritance as a motive for wealth ac¬ 
cumulation (especially since life-cycle savings may not be a substitute for 
but rather a supplement to transmissible wealth). 11 To be sure, it is quite 
difficult to say how different wealth accumulation would have been in the 
twentieth century in the absence of pay-as-you-go public pension systems, 
which guaranteed the vast majority of retirees a decent standard of living in 
a more reliable and equitable way than investment in financial assets, which 
plummeted after the war, could have done. It is possible that without such 
public pension systems, the overall level of wealth accumulation (measured by 
the capital/income ratio) would have been even greater than it is today. 12 In 
any case, the capital/income ratio is approximately the same today as it was in 
the Belle Epoque (when a shorter life expectancy greatly reduced the need to 
accumulate savings in anticipation of retirement), and annuitized wealth ac¬ 
counts for only a slightly larger portion of total wealth than it did a century ago. 

Note also the importance of gifts between living individuals over the past 
two centuries, as well as their spectacular rise over the past several decades. 
The total annual value of gifts was 30-40 percent of the annual value of in¬ 
heritances from 1820 to 1870 (during which time gifts came mainly in the 
form of dowries, that is, gifts to the spouse at the time of marriage, often with 
restrictions specified in the marriage contract). Between 1870 and 1970 the 
value of gifts decreased slightly, stabilizing at about 20-30 percent of inheri¬ 
tances, before increasing strongly and steadily to 40 percent in the 1980s, 60 
percent in the 1990s, and more than 80 percent in 2000-2010. Today, trans¬ 
mission of capital by gift is nearly as important as transmission by inheri¬ 
tance. Gifts account for almost half of present inheritance flows, and it is 
therefore essential to take them into account. Concretely, if gifts prior to death 
were not included, we would find that average wealth at death in 2000-2010 
was just over 20 percent higher than average wealth of the living. But this is 
simply a reflection of the fact that the dead have already passed on nearly half 
of their assets. If we include gifts made prior to death, we find that the (cor¬ 
rected) value of p is actually greater than 220 percent: the corrected wealth of 


392 


MERIT AND INHERITANCE IN THE LONG RUN 


the dead is nearly twice as great as that of the living. We are once again living 
in a golden age of gift giving, much more so than in the nineteenth century. 

It is interesting to note that the vast majority of gifts, today as in the nine¬ 
teenth century, go to children, often in the context of a real estate investment, 
and they are given on average about ten years before the death of the donor (a 
gap that has remained relatively stable over time). The growing importance of 
gifts since the 1970s has led to a decrease in the average age of the recipient: in 
1000 - 1010 , the average age of an heir is forty-five to fifty, while that of the 
recipient of a gift is thirty-five to forty, so that the difference between today and 
the nineteenth or early twentieth centuries is not as great as it seems from Fig¬ 
ure 11.3. 13 The most convincing explanation of this gradual and progressive in¬ 
crease of gift giving, which began in the 1970s, well before fiscal incentives were 
put in place in 1990-1000, is that parents with means gradually became aware 
that owing to the increase in life expectancy, there might be good reasons to share 
their wealth with their children at the age of thirty-five to forty rather than forty- 
five to fifty or even later. In any case, whatever the exact role of each of the various 
possible explanations, the fact is that the upsurge in gift giving, which we also 
find in other European countries, including Germany, is an essential ingredi¬ 
ent in the revived importance of inherited wealth in contemporary society. 

The Fifties and the Eighties: Age and Fortune in the Belle Epoque 

In order to better understand the dynamics of wealth accumulation and the 
detailed data used to calculate p, it is useful to examine the evolution of the 
average wealth profile as a function of age. Table 11.1 presents wealth-age pro¬ 
files for a number of years between 1810 and 2010. 14 The most striking fact is 
no doubt the impressive aging of wealth throughout the nineteenth century, 
as capital became increasingly concentrated. In 1820, the elderly were barely 
wealthier on average than people in their fifties (which I have taken as a reference 
group): sexagenarians were 34 percent wealthier and octogenarians 33 percent 
wealthier. But the gaps widened steadily thereafter. By 1900-1910, the average 
wealth of sexagenarians and septuagenarians was on the order of 60-80 percent 
higher than the reference group, and octogenarians were two and a half times 
wealthier. Note that these are averages for all of France. If we restrict our at¬ 
tention to Paris, where the largest fortunes were concentrated, the situation is 
even more extreme. On the eve of World War I, Parisian fortunes swelled with 


393 


THE STRUCTURE OF INEQUALITY 


TABLE II.I. 

The age-wealth profile in France, 1820-2010: Average wealth of each age group 
(%> of average wealth of so- to S9-year-olds) 


Year 

20-29 

years 

30-39 

years 

40-49 

years 

50-59 

years 

60-69 

years 

70-79 

years 

80 years 
and over 

1820 

2-9 

37 

47 

100 

134 

148 

153 

1850 

28 

37 

51 

100 

128 

144 

142 

1880 

30 

39 

61 

100 

148 

166 

220 

1902 

26 

57 

65 

100 

172 

176 

00 

1912 

13 

54 

71 

100 

00 

\S~\ 

178 

2-57 

1931 

22 

59 

77 

100 

113 

137 

143 

1947 

13 

51 

77 

100 

99 

76 

62 

i960 

28 

51 

74 

100 

no 

101 

87 

1984 

19 

55 

83 

100 

118 

113 

105 

2000 

19 

46 

66 

100 

122 

121 

118 

2010 

15 

41 

74 

100 

III 

106 

134 


Note : In i8zo, the average wealth of individuals aged 60-69 was 34% higher than that of 50- to 59-year- 
olds, and the average wealth of those aged 80 and over was 53% higher than that of 50- to 59-year-olds. 
Sources'. See piketty.pse.ens.fr/capitalzic, table z. 


age, with septuagenarians and octogenarians on average three or even four times 
as wealthy as fifty-year-olds . 15 To be sure, the majority of people died with no 
wealth at all, and the absence of any pension system tended to aggravate this 
“golden-age poverty.” But among the minority with some fortune, the aging of 
wealth is quite impressive. Quite clearly, the spectacular enrichment of octoge¬ 
narians cannot be explained by income front labor or entrepreneurial activity: it 
is hard to imagine people in their eighties creating a new startup every morning. 

This enrichment of the elderly is striking, in part because it explains the 
high value of p, the ratio of average wealth at time of death to average wealth 
of the living, in the Belle Epoque (and therefore the high inheritance flows), 
and even more because it tells us something quite specific about the underly¬ 
ing economic process. The individual data we have are quite clear on this 
point: the very rapid increase of wealth among the elderly in the late nine- 


394 





MERIT AND INHERITANCE IN THE LONG RUN 


teenth and early twentieth centuries was a straightforward consequence of 
the inequality r> g and of the cumulative and multiplicative logic it implies. 
Concretely, elderly people with the largest fortunes often enjoyed capital in¬ 
comes far in excess of what they needed to live. Suppose, for example, that 
they obtained a return of 5 percent and consumed two-fifths of their capital 
income while reinvesting the other three-fifths. Their wealth would then have 
grown at a rate of 3 percent a year, and by the age of eighty-five they would 
have been more than twice as rich as they were at age sixty. The mechanism is 
simple but extremely powerful, and it explains the observed facts very well, 
except that the people with the largest fortunes could often save more than 
three-fifths of their capital income (which would have accelerated the diver¬ 
gence process), and the general growth of mean income and wealth was not 
quite zero (but about 1 percent a year, which would have slowed it down a bit). 

The study of the dynamics of accumulation and concentration of wealth 
in France in 1870-1914, especially in Paris, has many lessons to teach about 
the world today and in the future. Not only are the data exceptionally de¬ 
tailed and reliable, but this period is also emblematic of the first globalization 
of trade and finance. As noted, it had modern, diversified capital markets, and 
individuals held complex portfolios consisting of domestic and foreign, pub¬ 
lic and private assets paying fixed and variable amounts. To be sure, economic 
growth was only 1-1.5 percent a year, but such a growth rate, as I showed ear¬ 
lier, is actually quite substantial from a generational standpoint or in the his¬ 
torical perspective of the very long run. It is by no means indicative of a static 
agricultural society. This was an era of technological and industrial innova¬ 
tion: the automobile, electricity, the cinema, and many other novelties became 
important in these years, and many of them originated in France, at least in 
part. Between 1870 and 1914, not all fortunes of fifty- and sixty-year-olds were 
inherited. Far from it: we find a considerable number of wealthy people who 
made their money through entrepreneurial activities in industry and finance. 

Nevertheless, the dominant dynamic, which explains most of the concen¬ 
tration of wealth, was an inevitable consequence of the inequality r>g. Re¬ 
gardless of whether the wealth a person holds at age fifty or sixty is inherited 
or earned, the fact remains that beyond a certain threshold, capital tends to 
reproduce itself and accumulates exponentially. The logic of r >g implies that 
the entrepreneur always tends to turn into a rentier. Even if this happens later 
in life, the phenomenon becomes important as life expectancy increases. The 


395 


THE STRUCTURE OF INEQUALITY 


fact that a person has good ideas at age thirty or forty does not imply that she 
will still be having them at seventy or eighty, yet her wealth will continue to 
increase by itself. Or it can be passed on to the next generation and continue 
to increase there. Nineteenth-century French economic elites were creative 
and dynamic entrepreneurs, but the crucial fact remains that their efforts 
ultimately—and largely unwittingly—reinforced and perpetuated a society 
of rentiers owing to the logic of r >g. 

The Rejuvenation of Wealth Owing to War 

This self-sustaining mechanism collapsed owing to the repeated shocks suf¬ 
fered by capital and its owners in the period 1914-1945. A significant rejuve¬ 
nation of wealth was one consequence of the two world wars. One sees this 
clearly in Figure 11.5: for the first time in history—and to this day the only 
time—average wealth at death in 1940-1950 fell below the average wealth of 
the living. This fact emerges even more clearly in the detailed profiles by age 
cohort in Table 11.1. In 1912, on the eve of World War I, octogenarians were 
more than two and a half times as wealthy as people in their fifties. In 1931, 
they were only 50 percent wealthier. And in 1947, the fifty-somethings were 
40 percent wealthier than the eighty-somethings. To add insult to injury, the 
octogenarians even fell slightly behind people in their forties in that year. 
This was a period in which all old certainties were called into question. In the 
years after World War II, the plot of wealth versus age suddenly took the form 
of a bell curve with a peak in the fifty to fifty-nine age bracket—a form close 
to the “Modigliani triangle,” except for the fact that wealth did not fall to 
zero at the most advanced ages. This stands in sharp contrast to the nineteenth 
century, during which the wealth-age curve was monotonically increasing 
with age. 

There is a simple explanation for this spectacular rejuvenation of wealth. 
As noted in Part Two, all fortunes suffered multiple shocks in the period 1914- 
1945—destruction of property, inflation, bankruptcy, expropriation, and so 
on—so that the capital/income ratio fell sharply. To a first approximation, 
one might assume that all fortunes suffered to the same degree, leaving the age 
profile unchanged. In fact, however, the younger generations, which in any 
case did not have much to lose, recovered more quickly from these wartime 
shocks than their elders did. A person who was sixty years old in 1940 and lost 


396 


MERIT AND INHERITANCE IN THE LONG RUN 


everything he owned in a bombardment, expropriation, or bankruptcy had 
little hope of recovering. He would likely have died between 1950 and i960 at 
the age of seventy or eighty with nothing to pass on to his heirs. Conversely, a 
person who was thirty in 1940 and lost everything (which was probably not 
much) still had plenty of time to accumulate wealth after the war and by the 
1950s would have been in his forties and wealthier than that septuagenarian. 
The war reset all counters to zero, or close to zero, and inevitably resulted in a 
rejuvenation of wealth. In this respect, it was indeed the two world wars that 
wiped the slate clean in the twentieth century and created the illusion that 
capitalism had been overcome. 

This is the central explanation for the exceptionally low inheritance flows 
observed in the decades after World War II: individuals who should have in¬ 
herited fortunes in 1950-1960 did not inherit much because their parents had 
not had time to recover from the shocks of the previous decades and died 
without much wealth to their names. 

In particular, this argument enables us to understand why the collapse of 
inheritance flows was greater than the collapse of wealth itself—nearly twice 
as large, in fact. As I showed in Part Two, total private wealth fell by more 
than two-thirds between 1910-1920 and 1950-1960: the private capital stock 
decreased from seven years of national income to just two to two and a half 
years (see Figure 3.6). The annual flow of inheritance fell by almost five-sixths, 
from 2.5 percent of national income on the eve of World War I to just 4-5 
percent in the 1950s (see Figure 11.1). 

The crucial fact, however, is that this situation did not last long. “Recon¬ 
struction capitalism” was by its nature a transitional phase and not the struc¬ 
tural transformation some people imagined. In 1950-1960, as capital was 
once again accumulated and the capital/income ratio (3 rose, fortunes began 
to age once more, so that the ratio p between average wealth at death and av¬ 
erage wealth of the living also increased. Growing wealth went hand in hand 
with aging wealth, thereby laying the groundwork for an even stronger come¬ 
back of inherited wealth. By i960, the profile observed in 1947 was already a 
memory: sexagenarians and septuagenarians were slightly wealthier than 
people in their fifties (see Table 11.1). The octogenarians’ turn came in the 
1980s. In 1990-2000 the graph of wealth against age was increasing even more 
steeply. By 2010, the average wealth of people in their eighties was more than 
30 percent higher than that of people in their fifties. If one were to include 


397 


THE STRUCTURE OF INEQUALITY 


(which Table ii.i does not) gifts made prior to death in the wealth of different 
age cohorts, the graph for 2000-2010 would be steeper still, approximately 
the same as in 1900-1910, with average wealth for people in their seventies 
and eighties on the order of twice as great as people in their fifties, except that 
most deaths now occur at a more advanced age, which yields a considerably 
higher p (see Figure 11.5). 

How Will Inheritance Flows Evolve in the 
Twenty-First Century? 

In view of the rapid increase of inheritance flows in recent decades, it is natu¬ 
ral to ask if this increase is likely to continue. Figure 11.6 shows two possible 
evolutions for the twenty-first century. The central scenario is based on the 
assumption of an annual growth rate of 1.7 percent for the period 2010-2100 
and a net return on capital of 3 percent. 16 The alternative scenario is based on 
the assumption that growth will be reduced to 1 percent for the period 2010- 
2100, while the return on capital will rise to 5 percent. This could happen, for 
instance, if all taxes on capital and capital income, including the corporate 
income tax, were eliminated, or if such taxes were reduced while capital’s 
share of income increased. 

In the central scenario, simulations based on the theoretical model 
(which successfully accounts for the evolutions of 1820-2010) suggest that 
the annual inheritance flow would continue to grow until 2030-2040 and 
then stabilize at around 16-17 percent of national income. According to the 
alternative scenario, the inheritance flow should increase even more until 
2060-2070 and then stabilize at around 24-25 percent of national income, 
a level similar to that observed in 1870-1910. In the first case, inherited 
wealth would make only a partial comeback; in the second, its comeback 
would be complete (as far as the total amount of inheritances and gifts is 
concerned). In both cases, the flow of inheritances and gifts in the twenty- 
first century is expected to be quite high, and in particular much higher than 
it was during the exceptionally low phase observed in the mid-twentieth 
century. 

Such predictions are obviously highly uncertain and are of interest pri¬ 
marily for their illustrative value. The evolution of inheritance flows in the 
twenty-first century depends on many economic, demographic, and political 


398 


MERIT AND INHERITANCE IN THE LONG RUN 



figure ii. 6 . Observed and simulated inheritance flow: France, 1820-1100 

Simulations based upon the theoretical model indicate that the level of the inheritance 
flow in the twenty-first century will depend upon the growth rate and the net rate of 
return to capital. 

Sources and series: see piketty.pse.ens.fr/capitalnc. 

factors, and history shows that these are subject to large and highly unpre¬ 
dictable changes. It is easy to imagine other scenarios that would lead to dif¬ 
ferent outcomes: for instance, a spectacular acceleration of demographic or 
economic growth (which seems rather implausible) or a radical change in 
public policy in regard to private capital or inheritance (which may be more 
realistic ). 17 

It is also important to note that the evolution of the wealth-age profile 
depends primarily on savings behavior, that is, on the reasons why different 
groups of people accumulate wealth. As already discussed at some length, 
there are many such reasons, and their relative importance varies widely from 
individual to individual. One may save in anticipation of retirement or job loss 
(life-cycle or precautionary saving). Or one may save to amass or perpetuate a 
family fortune. Or, indeed, one may simply have a taste for wealth and the 
prestige that sometimes goes with it (dynastic saving or pure accumulation). 
In the abstract, it is perfectly possible to imagine a world in which all people 
would choose to convert all of their wealth into annuities and die with noth¬ 
ing. If such behavior were suddenly to become predominant in the twenty-first 


399 
























































THE STRUCTURE OF INEQUALITY 


century, inheritance flows would obviously shrink to virtually zero, regardless 
of the growth rate or return on capital. 

Nevertheless, the two scenarios presented in Figure n.6 are the most plau¬ 
sible in light of currently available information. In particular, I have assumed 
that savings behavior in 2010-2100 will remain similar to what it has been in 
the past, which can be characterized as follows. Despite wide variations in 
individual behavior, we find that savings rates increase with income and ini¬ 
tial endowment, but variations by age group are much smaller: to a first ap¬ 
proximation, people save on average at a similar rate regardless of age. 18 In 
particular, the massive dissaving by the elderly predicted by the life-cycle the¬ 
ory of saving does not seem to occur, no matter how much life expectancy 
increases. The reason for this is no doubt the importance of the family trans¬ 
mission motive (no one really wants to die with nothing, even in aging societ¬ 
ies), together with a logic of pure accumulation as well as the sense of security— 
and not merely prestige or power—that wealth brings. 19 The very high 
concentration of wealth (with the upper decile always owning at least 50-60 
percent of all wealth, even within each age cohort) is the missing link that 
explains all these facts, which Modigliani’s theory totally overlooks. The grad¬ 
ual return to a dynastic type of wealth inequality since 1950-1960 explains 
the absence of dissaving by the elderly (most wealth belongs to individuals 
who have the means to finance their lifestyles without selling assets) and 
therefore the persistence of high inheritance flows and the perpetuation of 
the new equilibrium, in which mobility, though positive, is limited. 

The essential point is that for a given structure of savings behavior, the 
cumulative process becomes more rapid and inegalitarian as the return on 
capital rises and the growth rate falls. The very high growth of the three 
postwar decades explains the relatively slow increase of p (the ratio of average 
wealth at death to average wealth of the living) and therefore of inheritance 
flows in the period 1950-1970. Conversely, slower growth explains the ac¬ 
celerated aging of wealth and the rebound of inherited wealth that have oc¬ 
curred since the 1980s. Intuitively, when growth is high, for example, when 
wages increase 5 percent a year, it is easier for younger generations to accu¬ 
mulate wealth and level the playing field with their elders. When the growth 
of wages drops to 1-2 percent a year, the elderly will inevitably acquire most 
of the available assets, and their wealth will increase at a rate determined by 
the return on capital. 20 This simple but important process explains very well 


400 


MERIT AND INHERITANCE IN THE LONG RUN 


the evolution of the ratio p and the annual inheritance flow. It also explains 
why the observed and simulated series are so close for the entire period 
1820-2010. 21 

Uncertainties notwithstanding, it is therefore natural to think that these 
simulations provide a useful guide for the future. Theoretically, one can show 
that for a large class of savings behaviors, when growth is low compared to the 
return on capital, the increase in p nearly exactly balances the decrease in the 
mortality rate m, so that the product p X m is virtually independent of life 
expectancy and is almost entirely determined by the duration of a generation. 
The central result is that a growth of about 1 percent is in this respect not very 
different from zero growth: in both cases, the intuition that an aging popula¬ 
tion will spend down its savings and thus put an end to inherited wealth 
turns out to be false. In an aging society, heirs come into their inheritances 
later in life but inherit larger amounts (at least for those who inherit any¬ 
thing), so the overall importance of inherited wealth remains unchanged. 22 

From the Annual Inheritance Flow to the 
Stock of Inherited Wealth 

How does one go from the annual inheritance flow to the stock of inherited 
wealth? The detailed data assembled on inheritance flows and ages of the de¬ 
ceased, their heirs, and gift givers and recipients enable us to estimate for each 
year in the period 1820-2010 the share of inherited wealth in the total wealth 
of individuals alive in that year (the method is essentially to add up bequests 
and gifts received over the previous thirty years, sometimes more in the case 
of particularly early inheritances or exceptionally long lives or less in the op¬ 
posite case) and thus to determine the share of inherited wealth in total pri¬ 
vate wealth. The principal results are indicated in Figure 11.7, where I also 
show the results of simulations for the period 2010-2100 based on the two 
scenarios discussed above. 

The orders of magnitude to bear in mind are the following. In the nine¬ 
teenth and early twentieth centuries, when the annual inheritance flow was 
20-25 percent of national income, inherited wealth accounted for nearly all 
private wealth: somewhere between 80 and 90 percent, with an upward trend. 
Note, however, that in all societies, at all levels of wealth, a significant number 
of wealthy individuals, between 10 and 20 percent, accumulate fortunes during 


401 


THE STRUCTURE OF INEQUALITY 



figure 11.7. The share of inherited wealth in total wealth: France, 1850-2100 

Inherited wealth represents 80-90 percent of total wealth in France in the nineteenth 
century; this share fell to 40-50 percent during the twentieth century, and might re¬ 
turn to 80-90 percent during the twenty-first century. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


their lifetimes, having started with nothing. Nevertheless, inherited wealth 
accounts for the vast majority of cases. This should come as no surprise: if one 
adds up an annual inheritance flow of 20 percent of national income for ap¬ 
proximately thirty years, one accumulates a very large sum of legacies and 
gifts, on the order of six years of national income, which thus accounts for 
nearly all of private wealth. 23 

Over the course of the twentieth century, following the collapse of in¬ 
heritance flows, this equilibrium changed dramatically. The low point was 
attained in the 1970s: after several decades of small inheritances and accu¬ 
mulation of new wealth, inherited capital accounted for just over 40 per¬ 
cent of total private capital. For the first time in history (except in new 
countries), wealth accumulated in the lifetime of the living constituted the 
majority of all wealth: nearly 60 percent. It is important to realize two 
things: first, the nature of capital effectively changed in the postwar period, 
and second, we are just emerging from this exceptional period. Neverthe¬ 
less, we are now clearly out of it: the share of inherited wealth in total 
wealth has grown steadily since the 1970s. Inherited wealth once again ac- 


402 



































MERIT AND INHERITANCE IN THE LONG RUN 


counted for the majority of wealth in the 1980s, and according to the latest 
available figures it represents roughly two-thirds of private capital in France 
in 2010, compared with barely one-third of capital accumulated from sav¬ 
ings. In view of today’s very high inheritance flows, it is quite likely, if cur¬ 
rent trends continue, that the share of inherited wealth will continue to 
grow in the decades to come, surpassing 70 percent by 2020 and approach¬ 
ing 80 percent in the 2030s. If the scenario of 1 percent growth and 5 per¬ 
cent return on capital is correct, the share of inherited wealth could con¬ 
tinue to rise, reaching 90 percent by the 2050s, or approximately the same 
level as in the Belle Epoque. 

Thus we see that the U-shaped curve of annual inheritance flows as a pro¬ 
portion of national income in the twentieth century went hand in hand with 
an equally impressive U-shaped curve of accumulated stock of inherited 
wealth as a proportion of national wealth. In order to understand the relation 
between these two curves, it is useful to compare the level of inheritance flows 
to the savings rate, which as noted in Part Two is generally around 10 percent 
of national income. When the inheritance flow is 20-25 percent of national 
income, as it was in the nineteenth century, then the amounts received each 
year as bequests and gifts are more than twice as large as the flow of new sav¬ 
ings. If we add that a part of the new savings comes front the income of inher¬ 
ited capital (indeed, this was the major part of saving in the nineteenth cen¬ 
tury), it is clearly inevitable that inherited wealth will largely predominate 
over saved wealth. Conversely, when the inheritance flow falls to just 5 per¬ 
cent of national income, or half of new savings (again assuming a savings rate 
of 10 percent), as in the 1950s, it is not surprising that saved capital will domi¬ 
nate inherited capital. The central fact is that the annual inheritance flow 
surpassed the savings rate again in the 1980s and rose well above it in 2000- 
2010. Today it is nearly 15 percent of national income (counting both inheri¬ 
tances and gifts). 

To get a better idea of the sums involved, it may be useful to recall that 
household disposable (monetary) income is 70-75 percent of national income 
in a country like France today (after correcting for transfers in kind, such as 
health, education, security, public services, etc. not included in disposable in¬ 
come). If we express the inheritance flow not as a proportion of national in¬ 
come, as I have done thus far, but as a proportion of disposable income, we 
find that the inheritances and gifts received each year by French households 


403 


Annual value of inheritance and gifts 
(% household disposable income) 


THE STRUCTURE OF INEQUALITY 



figure ii. 8 . The annual inheritance flow as a fraction of household disposable in¬ 
come: France, 1820-2010 

Expressed as a fraction of household disposable income (rather than national income), 
the annual inheritance flow is about 20 percent in 2010, in other words, close to its 
nineteenth-century level. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


amounted to about 20 percent of their disposable income in the early 2010s, 
so that in this sense inheritance is already as important today as it was in 1820- 
1910 (see Figure 11.8). As noted in Chapter 5, it is probably better to use na¬ 
tional income (rather than disposable income) as the reference denominator 
for purposes of spatial and temporal comparison. Nevertheless, the compari¬ 
son with disposable income reflects today’s reality in a more concrete way and 
shows that inherited wealth already accounts for one-fifth of household mon¬ 
etary resources (available for saving, for example) and will soon account for a 
quarter or more. 


Back to Vautrin’s Lecture 

In order to have a more concrete idea of what inheritance represents in differ¬ 
ent people’s lives, and in particular to respond more precisely to the existen¬ 
tial question raised by Vautrin’s lecture (what sort of life can one hope to live 
on earned income alone, compared to the life one can lead with inherited 


404 































Share of inheritance of the total resources 
of each cohort 


MERIT AND INHERITANCE IN THE LONG RUN 



figure ii.9. The share ofinheritance in the total resources (inheritance and work) of 
cohorts born in 1790-2030 

Inheritance made about 25 percent of the resources of nineteenth-century cohorts, 
down to less than 10 percent for cohorts born in 1910-1920 (who should have inherited 
in 1950-1960). 

Sources and series: see piketty.pse.ens.fr/capital21c. 


wealth?), the best way to proceed is to consider things from the point of view 
of successive generations in France since the beginning of the nineteenth cen¬ 
tury and compare the various resources to which they would have had access 
in their lifetime. This is the only way to account correctly for the fact that an 
inheritance is not a resource one receives every year. 24 

Consider first the evolution of the share of inheritance in the total re¬ 
sources available to generations born in France in the period 1790-2030 (see 
Figure 11.9). I proceeded as follows. Starting with series of annual inheritance 
flows and detailed data concerning ages of the deceased, heirs, gift givers, and 
gift recipients, I calculated the share of inherited wealth in total available re¬ 
sources as a function of year of birth. Available resources include both inher¬ 
ited wealth (bequests and gifts) and income from labor, less taxes, 25 capital¬ 
ized over the individual’s lifetime using the average net return on capital in 
each year. Although this is the most reasonable way to approach the question 
initially, note that it probably leads to a slight underestimate of the share of 
inheritance, because heirs (and people with large fortunes more generally) are 


405 





































THE STRUCTURE OF INEQUALITY 


usually able to obtain a higher return on capital than the interest rate paid on 
savings from earned income. 26 

The results obtained are the following. If we look at all people born in 
France in the 1790s, we find that inheritance accounted for about 24 per¬ 
cent of the total resources available to them during their lifetimes, so that 
income from labor accounted for about 76 percent. For individuals born in 
the 1810s, the share of inheritance was 25 percent, leaving 75 percent for 
earned income. The same is approximately true for all the cohorts of the 
nineteenth century and up to World War I. Note that the 25 percent share 
for inheritance is slightly higher than the inheritance flow expressed as a 
percentage of national income (20-25 percent in the nineteenth century): 
this is because income from capital, generally about a third of national in¬ 
come, is de facto reassigned in part to inheritance and in part to earned 
income. 27 

For cohorts born in the 1870s and after, the share of inheritance in total 
resources begins to decline gradually. This is because a growing share of 
these individuals should have inherited after World War I and therefore re¬ 
ceived less than expected owing to the shocks to their parents’ assets. The 
lowest point was reached by cohorts born in 1910-1920: these individuals 
should have inherited in the years between the end of World War II and 
i960, that is, at a time when the inheritance flow had reached its lowest 
level, so that inheritance accounted for only 8-10 percent of total resources. 
The rebound began with cohorts born in 1930-1950, who inherited in 
1970-1990, and for whom inheritance accounted for 12-14 percent of total 
resources. But it is above all for cohorts born in 1970-1980, who began to 
receive gifts and bequests in 2000-2010, that inheritance regained an im¬ 
portance not seen since the nineteenth century: around 22-24 percent of 
total resources. These figures show clearly that we have only just emerged 
front the “end of inheritance” era, and they also show how differently differ¬ 
ent cohorts born in the twentieth century experienced the relative impor¬ 
tance of savings and inheritance: the baby boom cohorts had to make it on 
their own, almost as much as the interwar and turn-of-the-century cohorts, 
who were devastated by war. By contrast, the cohorts born in the last third 
of the century experienced the powerful influence of inherited wealth to 
almost the same degree as the cohorts of the nineteenth and twenty-first 
centuries. 


406 


MERIT AND INHERITANCE IN THE LONG RUN 


Rastignac’s Dilemma 

Thus far I have examined only averages. One of the principal characteristics of 
inherited wealth, however, is that it is distributed in a highly inegalitarian 
fashion. By introducing into the previous estimates inequality of inheritance 
on the one hand and inequality of earned income on the other, we will at last 
be able to analyze the degree to which Vautrin’s somber lesson was true in dif¬ 
ferent periods. Figure ii.io shows that the cohorts born in the late eighteenth 
century and throughout the nineteenth century, including Eugene de Rastig¬ 
nac’s cohort (Balzac tells us that he was born in 1798), did indeed face the 
terrible dilemma described by the ex-convict: those who could somehow lay 
hands on inherited wealth were able to live far better than those obliged to 
make their way by study and work. 

In order to make it possible to interpret the different levels of resources as 
concretely and intuitively as possible, I have expressed resources in terms of 
multiples of the average income of the least well paid 50 percent of workers in 
each period. We may take this baseline as the standard of living of the “lower 
class,” which generally claimed about half of national income in this period. 
This is a useful reference point for judging inequality in a society. 28 

The principal results obtained are the following. In the nineteenth cen¬ 
tury, the lifetime resources available to the wealthiest 1 percent of heirs (that 
is, the individuals inheriting the top 1 percent of legacies in their generation) 
were 15-30 times greater than the resources of the lower class. In other words, 
a person who could obtain such an inheritance, either from parents or via a 
spouse, could afford to pay a staff of 25-30 domestic servants throughout his 
life. At the same time, the resources afforded by the top 1 percent of earned 
incomes (in jobs such as judge, prosecutor, or attorney, as in Vautrin’s lecture) 
were about ten times the resources of the lower class. This was not negligible, 
but it was clearly a much lower standard of living, especially since, as Vautrin 
observed, such jobs were not easy to obtain. It was not enough to do bril¬ 
liantly in law school. Often one had to plot and scheme for many long years 
with no guarantee of success. Under such conditions, if the opportunity to lay 
hands on an inheritance in the top centile presented itself, it was surely better 
not to pass it up. At the very least, it was worth a moment’s reflection. 

If we now do the same calculation for the generations born in 1910-1920, 
we find that they faced different life choices. The top 1 percent of inheritances 


407 


Multiples of average income attained by 
bottom 50% wage earners 


THE STRUCTURE OF INEQUALITY 



figure 11.10. The dilemma of Rastignac for cohorts born in 1790-2030 

In the nineteenth century, the living standards that could be attained by the top 1 per¬ 
cent inheritors were a lot higher than those that could be attained by the top 1 percent 
labor earners. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


afforded resources that were barely 5 times the lower class standard. The best 
paid 1 percent of jobs still afforded 10-12 times that standard (as a conse¬ 
quence of the fact that the top centile of the wage hierarchy was relatively 
stable at about 6-7 percent of total wages over a long period). 29 For the first 
time in history, no doubt, one could live better by obtaining a job in the top 
centile rather than an inheritance in the top centile: study, work, and talent 
paid better than inheritance. 

The choice was almost as clear for the baby boom cohorts: a Rastignac 
born in 1940-1950 had every reason to aim for a job in the top centile (which 
afforded resources 10-12 times greater than the lower class standard) and to 
ignore the Vautrins of the day (since the top centile of inheritances brought in 
just 6-7 times the lower class standard). For all these generations, success 
through work was more profitable and not just more moral. 

Concretely, these results also indicate that throughout this period, and 
for all the cohorts born between 1910 and i960, the top centile of the in¬ 
come hierarchy consisted largely of people whose primary source of income 
was work. This was a major change, not only because it was a historical first 


408 































MERIT AND INHERITANCE IN THE LONG RUN 


(in France and most likely in all other European countries) but also because 
the top centile is an extremely important group in every society. 30 As noted 
in Chapter 7, the top centile is a relatively broad elite that plays a central 
role in shaping the economic, political, and symbolic structure of society. 31 
In all traditional societies (remember that the aristocracy represented 1-2 
percent of the population in 1789), and in fact down to the Belle Epoque 
(despite the hopes kindled by the French Revolution), this group was always 
dominated by inherited capital. The fact that this was not the case for the 
cohorts born in the first half of the twentieth century was therefore a major 
event, which fostered unprecedented faith in the irreversibility of social 
progress and the end of the old social order. To be sure, inequality was not 
eradicated in the three decades after World War II, but it was viewed pri¬ 
marily from the optimistic angle of wage inequalities. To be sure, there were 
significant differences between blue-collar workers, white-collar workers, 
and managers, and these disparities tended to grow wider in France in the 
1950s. But there was a fundamental unity to this society, in which everyone 
participated in the communion of labor and honored the meritocratic ideal. 
People believed that the arbitrary inequalities of inherited wealth were a 
thing of the past. 

For the cohorts born in the 1970s, and even more for those born later, 
things are quite different. In particular, life choices have become more com¬ 
plex: the inherited wealth of the top centile counts for about as much as the 
employment of the top centile (or even slightly more: 12-13 times the lower 
class standard of living for inheritance versus 10-11 times for earned in¬ 
come). Note, however, that the structure of inequality and of the top centile 
today is also quite different from what it was in the nineteenth century, be¬ 
cause inherited wealth is significantly less concentrated today than in the 
past. 32 Today’s cohorts face a unique set of inequalities and social structures, 
which are in a sense somewhere between the world cynically described by 
Vautrin (in which inheritance predominated over labor) and the enchanted 
world of the postwar decades (in which labor predominated over inheri¬ 
tance). According to our findings, the top centile of the social hierarchy in 
France today are likely to derive their income about equally from inherited 
wealth and their own labor. 


409 


THE STRUCTURE OF INEQUALITY 


The Basic Arithmetic of Rentiers and Managers 

To recapitulate: a society in which income from inherited capital predomi¬ 
nates over income from labor at the summit of the social hierarchy—that is, a 
society like those described by Balzac and Austen—two conditions must be 
satisfied. First, the capital stock and, within it, the share of inherited capital, 
must be large. Typically, the capital/income ratio must be on the order of 6 or 
7, and most of the capital stock must consist of inherited capital. In such a 
society, inherited wealth can account for about a quarter of the average re¬ 
sources available to each cohort (or even as much as a third if one assumes a 
high degree of inequality in returns on capital). This was the case in the eigh¬ 
teenth and nineteenth centuries, until 1914. This first condition, which con¬ 
cerns the stock of inherited wealth, is once again close to being satisfied 
today. 

The second condition is that inherited wealth must be extremely concen¬ 
trated. If inherited wealth were distributed in the same way as income from 
labor (with identical levels for the top decile, top centile, etc., of the hierar¬ 
chies of both inheritance and labor income), then Vautrin’s world could never 
exist: income from labor would always far outweigh income from inherited 
wealth (by a factor of at least three), 33 and the top 1 percent of earned incomes 
would systematically and mechanically outweigh the top 1 percent of incomes 
from inherited capital. 34 

In order for the concentration effect to dominate the volume effect, the 
top centile of the inheritance hierarchy must by itself claim the lion’s share of 
inherited wealth. This was indeed the case in the eighteenth and nineteenth 
centuries, when the top centile owned 50-60 percent of total wealth (or as 
much as 70 percent in Britain or Belle Epoque Paris), which is nearly 10 times 
greater than the top centile’s share of earned income (about 6-7 percent, a 
figure that remained stable over a very long period of time). This 10:1 ratio 
between wealth and salary concentrations is enough to counterbalance the 3:1 
volume ratio and explains why an inherited fortune in the top centile enabled 
a person to live practically 3 times better than an employment in the top cen¬ 
tile in the patrimonial society of the nineteenth century (see Figure 11.10). 

This basic arithmetic of rentiers and managers also helps us to understand 
why the top centiles of inherited wealth and earned income are almost bal¬ 
anced in France today: the concentration of wealth is about three times 


410 


MERIT AND INHERITANCE IN THE LONG RUN 


greater than the concentration of earned income (the top centile owns 20 
percent of total wealth, while the top centile of earners claims 6-7 percent of 
total wages), so the concentration effect roughly balances the volume effect. 
We can also see why heirs were so clearly dominated by managers during the 
Trente Glorieuses (the 3:1 concentration effect was too small to balance the 
10:1 mass effect). Apart from these situations, which are the result of extreme 
shocks and specific public policies (especially tax policies), however, the “nat¬ 
ural” structure of inequality seems rather to favor a domination of rentiers 
over managers. In particular, when growth is low and the return on capital is 
distinctly greater than the growth rate, it is almost inevitable (at least in the 
most plausible dynamic models) that wealth will become so concentrated that 
top incomes from capital will predominate over top incomes from labor by a 
wide margin. 35 

The Classic Patrimonial Society: The World of Balzac and Austen 

Nineteenth-century novelists obviously did not use the same categories we 
do to describe the social structures of their time, but they depicted the same 
deep structures: those of a society in which a truly comfortable life required 
the possession of a large fortune. It is striking to see how similar the inegali¬ 
tarian structures, orders of magnitude, and amounts minutely specified by 
Balzac and Austen were on both sides of the English Channel, despite the 
differences in currency, literary style, and plot. As noted in Chapter 2, mon¬ 
etary markers were extremely stable in the inflation-free world described by 
both novelists, so that they were able to specify precisely how large an in¬ 
come (or fortune) one needed to rise above mediocrity and live with a mini¬ 
mum of elegance. For both writers, the material and psychological threshold 
was about 30 times the average income of the day. Below that level, a Bal- 
zacian or Austenian hero found it difficult to live a dignified life. It was quite 
possible to cross that threshold if one was among the wealthiest 1 percent 
(and even better if one approached the top 0.5 or even 0.1 percent) of French 
or British society in the nineteenth century. This was a well-defined and 
fairly numerous social group—a minority, to be sure, but a large enough mi¬ 
nority to define the structure of society and sustain a novelistic universe. 36 
But it was totally out of reach for anyone content to practice a profession, no 
matter how well it paid: the best paid 1 percent of professions did not allow 


411 


THE STRUCTURE OF INEQUALITY 


one to come anywhere near this standard of living (nor did the best paid o.i 
percent). 37 

In most of these novels, the financial, social, and psychological setting is 
established in the first few pages and occasionally alluded to thereafter, so 
that the reader will not forget everything that sets the characters of the novel 
apart from the rest of society: the monetary markers that shape their lives, 
their rivalries, their strategies, and their hopes. In I-’ere Goriot, the old man’s 
fall from grace is conveyed at once by the fact that he has been obliged to 
make do with the filthiest room in the Yauquer boardinghouse and survive 
on the skimpiest of meals in order to reduce his annual expenditure to 500 
francs (or roughly the average annual income at the time—abject poverty for 
Balzac). 38 The old man sacrificed everything for his daughters, each of whom 
received a dowry of 500,000 francs, or an annual rent of 25,000 francs, about 
50 times the average income: in Balzac’s novels, this is the basic unit of for¬ 
tune, the symbol of true wealth and elegant living. The contrast between the 
two extremes of society is thus established at the outset. Nevertheless, Balzac 
does not forget that between abject poverty and true wealth all sorts of inter¬ 
mediate situations exist—some more mediocre than others. The small Rastig- 
nac estate near Angouleme yields barely 3,000 francs a year (or 6 times the 
average income). For Balzac, this is typical of the moneyless lesser nobility of 
the provinces. Eugene’s family can spare only 1,200 francs a year to pay for his 
law studies in the capital. In Vautrin’s lecture, the annual salary of 5,000 
francs (or 10 times average income) that young Rastignac could potentially 
earn as a royal prosecutor after much effort and with great uncertainty is the 
very symbol of mediocrity—proof, if proof were needed, that study leads no¬ 
where. Balzac depicts a society in which the minimum objective is to obtain 
20-30 times the average income of the day, or even 50 times (as Delphine and 
Anastasie are able to do thanks to their dowries), or better yet, too times, 
thanks to the 50,000 francs in annual rent that Mademoiselle Victorine’s 
million will earn. 

In Cesar Birotteau, the audacious perfumer also covets a fortune of a mil¬ 
lion francs so that he can keep half for himself and his wife while using the 
other half as a dowry for his daughter, which is what he believes it will take 
for her to marry well and allow his future son-in-law to purchase the practice 
of the notary Roguin. His wife, who would prefer to return to the land, tries 
to convince him that they can retire on an annual rent of 2,000 francs and 


412 


MERIT AND INHERITANCE IN THE LONG RUN 


marry their daughter with only 8,000 francs of rent, but Cesar will not hear 
of it: he does not want to wind up like his associate, Pillerault, who retired 
with just 5,000 francs of rent. To live well, he needs 20-30 times the average 
income. With only 5-10 times the average, one barely survives. 

We find precisely the same orders of magnitude on the other side of the 
Channel. In Sense and Sensibility, the kernel of the plot (financial as well as 
psychological) is established in the first ten pages in the appalling dialogue 
between John Dashwood and his wife, Fanny. John has just inherited the vast 
Norland estate, which brings in 4,000 pounds a year, or more than 100 times 
the average income of the day (which was barely more than 30 pounds a year 
in 1800-1810). 39 Norland is the quintessential example of a very large landed 
estate, the pinnacle of wealth in Jane Austen’s novels. With 2,000 pounds a 
year (or more than 60 times the average income), Colonel Brandon and his 
Delaford estate are well within expectations for a great landowner. In other 
novels we discover that 1,000 pounds a year is quite sufficient for an Austenian 
hero. By contrast, 600 pounds a year (20 times average income) is just enough 
to leave John Willoughby at the lower limit of a comfortable existence, and 
people wonder how the handsome and impetuous young man can live so large 
on so little. This is no doubt the reason why he soon abandons Marianne, 
distraught and inconsolable, for Miss Grey and her dowry of 50,000 pounds 
(2,500 pounds in annual rent, or 80 times average income), which is almost 
exactly the same size as Mademoiselle Yictorine’s dowry of a million francs 
under prevailing exchange rates. As in Balzac, a dowry half that size, such as 
Delphine’s or Anastasie’s, is perfectly satisfactory. For example, Miss Morton, 
the only daughter of Lord Norton, has a capital of 30,000 pounds (1,500 
pounds of rent, or 50 times average income), which makes her the ideal heiress 
and the quarry of every prospective mother-in-law, starting with Mrs. Ferrars, 
who has no difficulty imagining the girl married to her son Edward. 40 

From the opening pages, John Dashwood’s opulence is contrasted with 
the comparative poverty of his half-sisters, Elinor, Marianne, and Margaret, 
who, along with their mother, must get by on 500 pounds a year (or 125 
pounds apiece, barely four times the average per capita income), which is woe¬ 
fully inadequate for the girls to find suitable husbands. Mrs. Jennings, who 
revels in the social gossip of the Devonshire countryside, likes to remind them 
of this during the many balls, courtesy calls, and musical evenings that fill 
their days and frequently bring them into contact with young and attractive 


413 


THE STRUCTURE OF INEQUALITY 


suitors, who unfortunately do not always tarry: “The smallness of your fortune 
may make him hang back.” As in Balzac’s novels, so too in Jane Austen’s: only 
a very modest life is possible with just 5 or 10 times the average income. Incomes 
close to or below the average of 30 pounds a year are not even mentioned, 
moreover: this, one suspects, is not much above the level of the servants, so 
there is no point in talking about it. When Edward Ferrars thinks of becom¬ 
ing a pastor and accepting the parish of Deliford with its living of 200 pounds 
a year (between 6 and 7 times the average), he is nearly taken for a saint. Even 
though he supplements his living with the income from the small sum left 
him by his family as punishment for his mesalliance, and with the meager 
income that Elinor brings, the couple will not go very far, and “they were nei¬ 
ther of them quite enough in love to think that three hundred and fifty 
pounds a year would supply them with the comforts of life.” 41 This happy and 
virtuous outcome should not be allowed to hide the essence of the matter: by 
accepting the advice of the odious Fanny and refusing to aid his half-sisters or 
to share one iota of his immense fortune, despite the promises he made to his 
father on his deathbed, John Dashwood forces Elinor and Marianne to live 
mediocre and humiliating lives. Their fate is entirely sealed by the appalling 
dialogue at the beginning of the book. 

Toward the end of the nineteenth century, the same type of inegalitarian 
financial arrangement could also be found in the United States. In Washing¬ 
ton Square, a novel published by Henry James in 1881 and magnificently 
translated to the screen in William Wyler’s film The Heiress (1949), the plot 
revolves entirely around confusion as to the amount of a dowry. But arithme¬ 
tic is merciless, and it is best not to make a mistake, as Catherine Sloper dis¬ 
covers when her fiance flees on learning that her dowry will bring him only 
$10,000 a year in rent rather than the $30,000 he was counting on (or just 20 
times the average US income of the time instead of 60). “You are too ugly,” 
her tyrannical, extremely rich, widower father tells her, in a manner reminis¬ 
cent of Prince Bolkonsky with Princess Marie in War and Peace. Men can 
also find themselves in very fragile positions: in The Magnificent Ambersons, 
Orson Welles shows us the downfall of an arrogant heir, George, who at one 
point has enjoyed an annual income of $60,000 (120 times the average) before 
falling victim in the early 1900s to the automobile revolution and ending up 
with a job that pays a below-average $350 a year. 


414 


MERIT AND INHERITANCE IN THE LONG RUN 


Extreme Inequality of Wealth: A Condition of Civilization 
in a Poor Society ? 

Interestingly, nineteenth-century novelists were not content simply to de¬ 
scribe precisely the income and wealth hierarchies that existed in their time. 
They often give a very concrete and intimate account of how people lived and 
what different levels of income meant in terms of the realities of everyday life. 
Sometimes this went along with a certain justification of extreme inequality 
of wealth, in the sense that one can read between the lines an argument that 
without such inequality it would have been impossible for a very small elite to 
concern themselves with something other than subsistence: extreme inequal¬ 
ity is almost a condition of civilization. 

In particular, Jane Austen minutely describes daily life in the early nine¬ 
teenth century: she tells us what it cost to eat, to buy furniture and clothing, 
and to travel about. And indeed, in the absence of modern technology, every¬ 
thing is very costly and takes time and above all staff. Servants are needed to 
gather and prepare food (which cannot easily be preserved). Clothing costs 
money: even the most minimal fancy dress might cost several months’ or even 
years’ income. Travel was also expensive. It required horses, carriages, servants 
to take care of them, feed for the animals, and so on. The reader is made to see 
that life would have been objectively quite difficult for a person with only 3-5 
times the average income, because it would then have been necessary to spend 
most of one’s time attending to the needs of daily life. If you wanted books or 
musical instruments or jewelry or ball gowns, then there was no choice but to 
have an income 20-30 times the average of the day. 

In Part One I noted that it was difficult and simplistic to compare purchas¬ 
ing power over long periods of time because consumption patterns and prices 
change radically in so many dimensions that no single index can capture the 
reality. Nevertheless, according to official indices, the average per capita pur¬ 
chasing power in Britain and France in 1800 was about one-tenth what it was in 
2010. In other words, with 20 or 30 times the average income in 1800, a person 
would probably have lived no better than with 2 or 3 times the average income 
today. With 5-10 times the average income in 1800, one would have been in a 
situation somewhere between the minimum and average wage today. 

In any case, a Balzacian or Austenian character would have used the ser¬ 
vices of dozens of servants with no embarrassment. For the most part, we are 


415 


THE STRUCTURE OF INEQUALITY 


not even told their names. At times both novelists mocked the pretensions 
and extravagant needs of their characters, as, for example, when Marianne, 
who imagines herself in an elegant marriage with Willoughby, explains with 
a blush that according to her calculations it is difficult to live with less than 
2,000 pounds a year (more than 6 o times the average income of the time): “I 
am sure I am not extravagant in my demands. A proper establishment of ser¬ 
vants, a carriage, perhaps two, and hunters, cannot be supported on less.” 42 
Elinor cannot refrain from pointing out to her sister that she is being extrava¬ 
gant. Similarly, Vautrin himself observed that it took an income of 25,000 
francs (more than 50 times the average) to live with a minimum of dignity. In 
particular, he insists, with an abundance of detail, on the cost of clothing, 
servants, and travel. No one tells him that he is exaggerating, but Vautrin is so 
cynical that readers are in no doubt. 43 One finds a similarly unembarrassed 
recital of needs, with a similar notion of how much it takes to live comfort¬ 
ably, in Arthur Young’s account of his travels. 44 

Notwithstanding the extravagance of some of their characters, these 
nineteenth-century novelists describe a world in which inequality was to a 
certain extent necessary: if there had not been a sufficiently wealthy minority, 
no one would have been able to worry about anything other than survival. 
This view of inequality deserves credit for not describing itself as meritocratic, 
if nothing else. In a sense, a minority was chosen to live on behalf of everyone 
else, but no one tried to pretend that this minority was more meritorious or 
virtuous than the rest. In this world, it was perfectly obvious, moreover, that 
without a fortune it was impossible to live a dignified life. Having a diploma 
or skill might allow a person to produce, and therefore to earn, 5 or 10 times 
more than the average, but not much more than that. Modern meritocratic 
society, especially in the United States, is much harder on the losers, because 
it seeks to justify domination on the grounds of justice, virtue, and merit, to 
say nothing of the insufficient productivity of those at the bottom. 45 

Meritocratic Extremism in Wealthy Societies 

It is interesting, moreover, to note that the most ardent meritocratic beliefs 
are often invoked to justify very large wage inequalities, which are said to be 
more justified than inequalities due to inheritance. From the time of Napo¬ 
leon to World War I, France has had a small number of very well paid and 


MERIT AND INHERITANCE IN THE LONG RUN 


high-ranking civil servants (earning 50-100 times the average income of the 
day), starting with government ministers. This has always been justified— 
including by Napoleon himself, a scion of the minor Corsican nobility—by 
the idea that the most capable and talented individuals ought to be able to live 
on their salaries with as much dignity and elegance as the wealthiest heirs (a 
top-down response to Vautrin, as it were). As Adolphe Thiers remarked in the 
Chamber of Deputies in 1831: “prefects should be able to occupy a rank equal 
to the notable citizens in the departements they live in .” 46 In 1881, Paul Leroy- 
Beaulieu explained that the state went too far by raising only the lowest sala¬ 
ries. He vigorously defended the high civil servants of his day, most of whom 
received little more than “15,000 to 20,000 francs a year”; these were “figures 
that might seem enormous to the common man” but actually “make it impos¬ 
sible to live with elegance or amass savings of any size .” 47 

The most worrisome aspect of this defense of meritocracy is that one finds 
the same type of argument in the wealthiest societies, where Jane Austen’s 
points about need and dignity make little sense. In the United States in recent 
years, one frequently has heard this type of justification for the stratospheric 
pay of supermanagers (50-100 times average income, if not more). Propo¬ 
nents of such high pay argued that without it, only the heirs of large fortunes 
would be able to achieve true wealth, which would be unfair. In the end, 
therefore, the millions or tens of millions of dollars a year paid to superman¬ 
agers contribute to greater social justice. 48 This kind of argument could well 
lay the groundwork for greater and more violent inequality in the future. The 
world to come may well combine the worst of two past worlds: both very large 
inequality of inherited wealth and very high wage inequalities justified in 
terms of merit and productivity (claims with very little factual basis, as noted). 
Meritocratic extremism can thus lead to a race between supermanagers and 
rentiers, to the detriment of those who are neither. 

It also bears emphasizing that the role of meritocratic beliefs in justifying 
inequality in modern societies is evident not only at the top of hierarchy but 
lower down as well, as an explanation for the disparity between the lower and 
middle classes. In the late 1980s, Michele Lamont conducted several hundred 
in-depth interviews with representatives of the “upper middle class” in the 
United States and France, not only in large cities such as New York and Paris 
but also in smaller cities such as Indianapolis and Clermont-Ferrand. She 
asked about their careers, how they saw their social identity and place in 


417 


THE STRUCTURE OF INEQUALITY 


society, and what differentiated them from other social groups and categories. 
One of the main conclusions of her study was that in both countries, the “ed¬ 
ucated elite” placed primary emphasis on their personal merit and moral 
qualities, which they described using terms such as rigor, patience, work, ef¬ 
fort, and so on (but also tolerance, kindness, etc .). 49 The heroes and heroines 
in the novels of Austen and Balzac would never have seen the need to com¬ 
pare their personal qualities to those of their servants (who go unmentioned 
in their texts). 


The Society of Petits Rentiers 

The time has come to return to today’s world, and more precisely to France in 
the 2010S. According to my estimates, inheritance will represent about one 
quarter of total lifetime resources (from both inheritance and labor) for cohorts 
born in the 1970s and after. In terms of total amounts involved, inheritance 
has thus nearly regained the importance it had for nineteenth-century cohorts 
(see Figure 11.9). I should add that these predictions are based on the central 
scenario: if the alternative scenario turns out to be closer to the truth (lower 
growth, higher net return on capital), inheritance could represent a third or 
even as much as four-tenths of the resources of twenty-first-century cohorts . 50 

The fact that the total volume of inheritance has regained the same level as 
in the past does not mean that it plays the same social role, however. As noted, 
the very significant deconcentration of wealth (which has seen the top cen- 
tile’s share decrease by nearly two-thirds in a century from 60 percent in 
1910-1920 to just over 20 percent today) and the emergence of a patrimonial 
middle class imply that there are far fewer very large estates today than there 
were in the nineteenth century. Concretely, the dowries of 500,000 francs 
that Pere Goriot and Cesar Birotteau sought for their daughters—dowries 
that yielded an annual rent of 25,000 francs, or 50 times the average annual 
per capita income of 500 francs at that time—would be equivalent to an es¬ 
tate of 30 million euros today, with a yield in interest, dividends, and rents on 
the order of 1.5 million euros a year (or 50 times the average per capita income 
of 30,000 euros ). 51 Inheritances of this magnitude do exist, as do considerably 
larger ones, but there are far fewer of them than in the nineteenth century, 
even though the total volume of wealth and inheritance has practically re¬ 
gained its previous high level. 


MERIT AND INHERITANCE IN THE LONG RUN 


Furthermore, no contemporary novelist would fill her plots with estates 
valued at 30 million euros as Balzac, Austen, and James did. Explicit mone¬ 
tary references vanished from literature after inflation blurred the meaning 
of the traditional numbers. But more than that, rentiers themselves vanished 
from literature as well, and the whole social representation of inequality 
changed as a result. In contemporary fiction, inequalities between social 
groups appear almost exclusively in the form of disparities with respect to 
work, wages, and skills. A society structured by the hierarchy of wealth has 
been replaced by a society whose structure depends almost entirely on the hi¬ 
erarchy of labor and human capital. It is striking, for example, that many re¬ 
cent American TV series feature heroes and heroines laden with degrees and 
high-level skills, whether to cure serious maladies {House), solve mysterious 
crimes {Bones), or even to preside over the United States {West Wing). The 
writers apparently believe that it is best to have several doctorates or even a 
Nobel Prize. It is not unreasonable to interpret any number of such series as 
offering a hymn to a just inequality, based on merit, education, and the social 
utility of elites. Still, certain more recent creations depict a more worrisome 
inequality, based more clearly on vast wealth. Damages depicts unfeeling big 
businessmen who have stolen hundreds of millions of dollars from their work¬ 
ers and whose even more selfish spouses want to divorce their husbands with¬ 
out giving up the cash or the swimming pool. In season 3, inspired by the 
Madoff affair, the children of the crooked financier do everything they can to 
hold on to their father’s assets, which are stashed in Antigua, in order to 
maintain their high standard of living. 52 In Dirty Sexy Money we see decadent 
young heirs and heiresses with little merit or virtue living shamelessly on fam¬ 
ily money. But these are the exceptions that prove the rule, and any character 
who lives on wealth accumulated in the past is normally depicted in a nega¬ 
tive light, if not frankly denounced, whereas such a life is perfectly natural in 
Austen and Balzac and necessary if there are to be any true feelings among the 
characters. 

This huge change in the social representation of inequality is in part 
justified, yet it rests on a number of misunderstandings. First, it is obvious 
that education plays a more important role today than in the eighteenth 
century. (In a world where nearly everyone possesses some kind of degree 
and certain skills, it is not a good idea to go without: it is in everyone’s inter¬ 
est to acquire some skill, even those who stand to inherit substantial wealth, 


419 


THE STRUCTURE OF INEQUALITY 


especially since inheritance often conies too late from the standpoint of the 
heirs.) However, it does not follow that society has become more merito¬ 
cratic. In particular, it does not follow that the share of national income 
going to labor has actually increased (as noted, it has not, in any substantial 
amount), and it certainly does not follow that everyone has access to the 
same opportunities to acquire skills of every variety. Indeed, inequalities of 
training have to a large extent simply been translated upward, and there is 
no evidence that education has really increased intergenerational mobil¬ 
ity. 53 Nevertheless, the transmission of human capital is always more com¬ 
plicated than the transmission of financial capital or real estate (the heir 
must make some effort), and this has given rise to a widespread—and par¬ 
tially justified—faith in the idea that the end of inherited wealth has made 
for a more just society. 

The chief misunderstanding is, I think, the following. First, inheritance 
did not come to an end: the distribution of inherited capital has changed, 
which is something else entirely. In France today, there are certainly fewer 
very large estates—estates of 30 million or even 5 or 10 million euros are less 
common—than in the nineteenth century. But since the total volume of in¬ 
herited wealth has almost regained its previous level, it follows that there are 
many more substantial and even fairly large inheritances: 200,000, 300,000, 
1 million, or even 2 million euros. Such bequests, though much too small to 
allow the beneficiaries to give up all thought of a career and live on the inter¬ 
est, are nevertheless substantial amounts, especially when compared with 
what much of the population earns over the course of a working lifetime. In 
other words, we have moved from a society with a small number of very 
wealthy rentiers to one with a much larger number of less wealthy rentiers: a 
society of petits rentiers if you will. 

The index that I think is most pertinent for representing this change is 
presented in Figure 11.11. It is the percentage of individuals in each cohort who 
inherit (as bequest or gift) amounts larger than the least well paid 50 percent of 
the population earn in a lifetime. This amount changes over time: at present, 
the average annual wage of the bottom half of the income distribution is 
around 15,000 euros, or a total of 750,000 euros over the course of a fifty-year 
career (including retirement). This is more less what a life at minimum wage 
brings in. As the figure shows, in the nineteenth century about 10 percent of a 
cohort inherited amounts greater than this. This proportion fell to barely more 


420 


Fraction of each cohort 


MERIT AND INHERITANCE IN THE LONG RUN 



figure ii.ii. Which fraction of a cohort receives in inheritance the equivalent of a 
lifetime labor income? 

Within the cohorts born around 1970-1980, 12-14 percent of individuals receive in 
inheritance the equivalent of the lifetime labor income received by the bottom 50 per¬ 
cent less well paid workers. 

Sources and series: see piketty.pse.ens.fr/capital21c. 


than 2 percent for cohorts born in 1910-1920 and 4-5 percent for cohorts born 
in 1930-1950. According to my estimates, the proportion has already risen to 
about 12 percent for cohorts born in 1970-1980 and may reach or exceed 15 
percent for cohorts born in 2010-2020. In other words, nearly one-sixth of 
each cohort will receive an inheritance larger than the amount the bottom half 
of the population earns through labor in a lifetime. (And this group largely 
coincides with the half of the population that inherits next to nothing .). 54 Of 
course, there is nothing to prevent the inheriting sixth from acquiring diplo¬ 
mas or working and no doubt earning more through work than the bottom 
half of the income distribution. This is nevertheless a fairly disturbing form of 
inequality, which is in the process of attaining historically unprecedented 
heights. It is also more difficult to represent artistically or to correct politically, 
because it is a commonplace inequality opposing broad segments of the popu¬ 
lation rather than pitting a small elite against the rest of society. 


421 





























THE STRUCTURE OF INEQUALITY 


The Rentier, Enemy of Democracy 

Second, there is no guarantee that the distribution of inherited capital will 
not ultimately become as inegalitarian in the twenty-first century as it was in 
the nineteenth. As noted in the previous chapter, there is no ineluctable force 
standing in the way of a return to extreme concentration of wealth, as ex¬ 
treme as in the Belle Epoque, especially if growth slows and the return on 
capital increases, which could happen, for example, if tax competition be¬ 
tween nations heats up. If this were to happen, I believe that it would lead to 
significant political upheaval. Our democratic societies rest on a meritocratic 
worldview, or at any rate a meritocratic hope, by which I mean a belief in a 
society in which inequality is based more on merit and effort than on kinship 
and rents. This belief and this hope play a very crucial role in modern society, 
for a simple reason: in a democracy, the professed equality of rights of all citi¬ 
zens contrasts sharply with the very real inequality of living conditions, and 
in order to overcome this contradiction it is vital to make sure that social in¬ 
equalities derive from rational and universal principles rather than arbitrary 
contingencies. Inequalities must therefore be just and useful to all, at least in 
the realm of discourse and as far as possible in reality as well. (“Social distinc¬ 
tions can be based only on common utility,” according to article i of the 1789 
Declaration of the Rights of Man and the Citizen.) In 1893, Emile Durkheim 
predicted that modern democratic society would not put up for long with the 
existence of inherited wealth and would ultimately see to it that ownership of 
property ended at death. 55 

It is also significant that the words “rent” and “rentier” took on highly pe¬ 
jorative connotations in the twentieth century. In this book, I use these words 
in their original descriptive sense, to denote the annual rents produced by a 
capital asset and the individuals who live on those rents. Today, the rents pro¬ 
duced by an asset are nothing other than the income on capital, whether in 
the form of rent, interest, dividends, profits, royalties, or any other legal cate¬ 
gory of revenue, provided that such income is simply remuneration for own¬ 
ership of the asset, ind